Fundamentals of Business Law: Contracts and Special Contracts, Study notes of Business and Labour Law

Download Fundamentals of Business Law: Contracts and Special Contracts and more Study notes Business and Labour Law in PDF only on Docsity! Business Law, An Introduction General Introduction Meaning, basic theories and essential features of law The meaning of law The term law has various meanings and there is no a universally recognized and accepted definition of law. For some, “law is that portion of the established habit and thought of humankind, which has gained distinct and formal recognition in the shape of uniform rules backed by the authority power of the government.”1 For others, it means “a rule of external human action enforced by the sovereign political authority”.2 A certain legal scholar namely, Sir. John Salmond defined law as “the body of principles recognized and applied by the state in the administration of justice.”3 Another legal scholar Anson coined the following definition for the term law; i.e. “the object of law is order, and the result of order is that men are enabled to look ahead with some sort of security as to the future. Although human action cannot be reduced to the uniformities of nature, men have yet endeavored to reproduce by law something approaching to this uniformity.”4 We can list down dozen of definitions of law given by different lawyers from different angles or views, but as it has been said above, since there is no universally accepted definition of the term, for the purpose of introduction, the above mentioned definitions are enough. Let us now try to have a look at the basic theories of law in a very brief manner. Basic theories of law Just like there are various definitions of law, there are different kinds of theories of Law however, we will try to consider only four of them. The first theory is known as the Natural law theory; this theory tries to insist that law is a set of rules, which are in accordance with nature and reason. The super natural being that created man has also created law for him/her i.e. for human being. According to this theory, every human law or manmade law will be true and perfect so long as it is in line with the law of nature and natural moral principles. Natural law can only be discovered through natural reason. Any human law, which does not conform to the rule of nature and natural justice, cannot be taken as law. 1. Kuchhal, M.C., Mercantile law, 5th rev. ed., Vicas Pub. PLC. 1999. pp.1 2. Sen, A.K. And Mitra, J.K., Commercial law, 21st rev. ed., the world press PLC, 1994. pp.1 3. Id. 4. Id. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 1 Business Law, An Introduction The second theory of law is called the positive law theory and this theory says law is the command of the sovereign. According to the understanding of the supporters of this theory, law has three essential features; namely, A. it’s being a type of command B. it’s being laid down by a political sovereign (political body i.e. the government) C. it’s being enforceable by sanction. This theory stresses that law is only law if it is effective, and this can only be by being generally obeyed. It does not matter whether it conforms to the rules of nature or objective moral standards and natural justice, if it is applicable and if the violators of such law are punished, that law is the true and perfect law by itself. The third theory Marxist theory, marxists explain that law and human rights arise from the interactions of human beings within social structures that contain economic class distinctions. Class divisions within societies create conflict and disorder and therefore law (and the state) comes into existence to deal with this conflict. The fourth theory is called the theory of legal realism, according to this theory, law is the actual practice of the courts or it is what the judge decides in court. Law is the decision of the courts not the legislation that has been made by the proper law making body i.e. the parliament. These theorists agree with the positivists that law is the expression of the will of the sovereign, but the sovereign is not the law making body but the courts for lega realists. In other words, for the realists, law is simply what the judge say in court. Essential features of law Law has generally three essential characteristic features. These are; 1. Generality is the first essential feature of law; rules of law are general statements on possible human behavior that is rules of law do not expressly deal with particular person. When a certain law is made by the proper law making body, by the parliament in the case of our country, it will concern the nation generally, we can understand this by its wordings which usually begins “who so ever......” or “any one.......” and such other terms. For example, “Every person has the inviolable and inalienable right to life, the security of person and liberty.”[Article 14 of the 1995 Constitution of the Federal Democratic By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 2 Business Law, An Introduction “branch of law which comprises laws concerning trade, industry and commerce.”6 As regards to the scope of business law, with the increasing complexities of the modern business world, it has enormously widened. It is generally understood to include the laws relating to concept of contract, companies, negotiable instruments, insurance, banking transactions and personality. Therefore, the importance of business law is to help students understand the legal aspects of common business activities. not only to students, but also any business person will be benefited from knowing business law in order to appreciate the direct application of it on the day to day business activity and to run his/her business in the proper legal way. Chapter1 Personality 1.1. The notion of personality 1.2. What is a person? Personality means just the state of being a person. We may have one clear understanding about what a person is. However, what we commonly know a person could be different from that how the law understands the term. Legally, a person is any being that bears or holds rights and duties. In other words, a person is a subject of rights and duties. 1.3. Classification of personality A Person can be classified in to two, - Natural (physical) person, and - Artificial (legal) or fictitious person. Natural (physical) persons are persons who get their personality from nature i.e. human beings. Artificial (legal) or fictitious persons are persons not by nature but by the mere operation of the law. These kinds of persons get their personality from the law because without having personality, they may not be allowed to enter in to any kind of legal transaction including business transactions. Example of such are: business organizations, civic associations, trusts, churches and mosques and similar religious organizations, etc... 1.4. The commencement of personality The term commencement simply refers to as beginning, and when we say the commencement of personality, we are asking the question ‘when does personality begin and when does it end?’ the 6. Kuchhal, cited above, pp.1 By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 5 Business Law, An Introduction beginning of natural personality is different from the beginning of legal personality. Let us consider them separately as follows, - The commencement of natural personality: - according to art. 1 of the Ethiopian civil code, natural personality begins at birth and ends at death. Therefore, the commencement of natural personality is birth and its end is death. However, this being the principle, it has an exception that even a merely conceived child (a child in his/her mother’s womb and not yet born) may be considered sometimes as a person provided that some legal requirements are fulfilled. These requirements are clearly indicated under art. 2 of the Civil Code of Ethiopia, i.e. A) the child should be born alive and viable7 (Should live at least for 48 hours after he is born), and B) If his interest so demands. The viability issue is raised only whenever the father died before his pregnant wife gives birth. In such condition, for the conceived child to exercise its right of succession and other rights from the late father the above two conditions should be met. Neither stillborn baby nor alive baby who died before the reach 48 hours never be considered viable and not his interest is protected by law. The presumption laid hear above may be rebutted if the death of the child is proved due to a cause other than a deficiency in his/her internal constitution. It is to mean that the death is due to external cause after born alive before the attainment of 48 hours, such as the child fall and crush in the ground; the child is viable in the eye of the Law. A child is also considered conceived on the three hundredth day which precedes his/her birth. Such date of conception shall not be contested unless in order to establish who is the father of the child. Consider the following example: Mr. X, who was a successful business person, died in a car accident leaving behind a wife who is pregnant and left with only two months to give birth. Nevertheless, shortly after his death, the parents of Mr. X came and took over all his property by virtue of the Ethiopian law of succession.8 After all this, the late Mr. X’s wife gave birth to a healthy and cute baby girl. At this time, the 7. Viability means simply an aptitude or ability to live for a certain period of time. 8 . Under art. 843 of the Ethiopian civil code(the law of succession), if a person died without any descendants (children), and left no will, his parents will inherit all of his/her property and note that a wife can’t succeed her husband and the opposite is also true. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 6 Business Law, An Introduction mother can reclaim the property of her late husband by representing her daughter pursuant to art. 2 and art. 842(1) of the civil code because the interest of the child justifies so. Bear in mind also that if a child merely conceived already died due to an external factor after it could come to this world alive, he/she would be considered as a person. But, if the child’s death in his/her mother’s womb results from an internal deficiency, the conceived child is not a person before the eyes of the law. In the above example, if the parents of Mr. X force the mother by any means to abort the child or if they prevent the successful and healthy birth of the child, it cannot be considered as an external factor which results the death of the child as per art. 4(2) and (3) of the Ethiopian Civil Code. As natural persons begins to live starting the day of their birth, save some exceptions which we considered above, their personality will come to an end on the day of their death. In other words, after death, that human being is not considered as a person, i.e. no more a subject of rights and duties. The commencement of legal personality: - just like human beings begins to live from the day of their birth, a certain legal entity starts to be a person when three legal requirements are met cumulatively (together). The first one is, formation: a certain entity, be it a business organization or a civic association, should be first established, i.e. the founders has to prepare the memorandum and articles of association, the number of the members should meet with the minimum requirement of the law, and so on. The second step is registration: after the members fulfill all the requirements of formation, they should go to the concerned government organ to have their enterprise registered, if the would be entity is a business organization, they should have it registered in the ministry of trade and industry or in the respective trade and industry Bureaus of regional states as the case may be, and if it is to be a civic association, the members should go to the ministry of justice which is authorized to register such kind of associations. The third and the last step is publication: once the entity is formed and registered, it has to be publicized to the society through the official newspaper; however this precondition is not mandatory for every legal persons. It is after all the above-mentioned procedural requirements of the law are fulfilled that an entity is considered to be a person before the eyes of the law. But again, just like the end of natural personality is death, the end of legal personality is dissolution and winding-up of that entity. If a By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 7 Business Law, An Introduction activities should be managed. One of these private legal regimes that deal with such consensual relations among persons is the law of contract. As usual, Let us start by defining what a contract is. 2.1. Definition of contract What is a contract? We may define the term contract in so many ways based on our common sense understanding. But the law, under art. 1675 of the Civil Code, defined the term contract as follows: “A contract is an agreement between two or more persons as between themselves create, vary or extinguish an obligation of a proprietary nature.” we can identify the elements from the above definition.  A contract is an agreement that it emanates from the mutual consent or meeting of minds between the contracting parties. This agreement will have a legal effect provided that both parties have the intention to be obliged or bound (Intentio Obligandi).  A contract requires at least two or more person or plurality of parties. In other words, at least in principle, one can’t conclude a contract with him/herself. However, this being a principle, it has an exception that especially in contract of agency, the agent may conclude a contract with him/her self.10 The detail how it happens is discussed in the Law of Agency, chapter three, of this material.  These parties creates a relationship between themselves, in other words, the contracting parties can’t create an obligation on third parties that third party may not be obliged or may not be beneficial by virtue of the contractual relationship between the original contracting parties. But again this is the rule (the principle) and we have an exception for this too.  An obligation is a legal bound by which a person is constrained towards another person to do or not to do something. It is a legal bond between two or more persons in virtue of which one of them is bound in favor of the other to do a certain act or to abstain from doing a certain act. An obligation can be classified as legal and 10. We will consider the notion of contract of agency in Ch. 3 under the title special contracts. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 10 Business Law, An Introduction contractual obligation based on its source. The source of contractual obligation is the contract between the parties; where as the source of legal obligation is the law itself. This legal obligation may further be classified in to two, namely pure legal obligation and extra (non-contractual) obligation. An example for a pure legal obligation is the obligation to pay tax. Non-contractual (extra-contractual) obligations arise when a person due to his/her fault or even without fault is going to be held liable. For instance, if a driver run over a pedestrian, he/she will be legally liable due to his/her fault. A father or a mother is legally liable for the act that their minor son/daughter has done. We can also classify an obligation in to three classes, i.e. obligation to do, obligation not to do (obligation of abstinence) and obligation to give. We have two other types of obligations and the basis of this classification is the nature of the obligation itself; these are obligation of diligence and obligation of result. In an obligation of diligence, the person who is under the obligation is not expected to bring about the desired result; rather he/she is only expected to show a due diligence. For instance, a Lawyer (Attorney) is expected to do whatever he/she can do to win the case but he/she can’t be sued for not winning the suit. a medical doctor is also required to show a due diligence that he/she has to use all of his/her skill to save the patient, but this doctor can’t be brought to court simply because he/she doesn’t save the patient. On the other hand, in obligation of result, a determined result is expected from the person under such obligation. For instance, a painter is expected to bring about the desired result, i.e. the painting of the whole house as ordered by the owner.  The contract should be of a proprietary nature. Every contract is an agreement but not every agreement is a contract. For instance, Marriage and Adoption are not considered to be contract because their ultimate objective doesn’t have a patrimonial or pecuniary nature. In other words, either Marriage or Adoption is not about money; rather they are the issue status. Their objective is something beyond money. The objective of Marriage is fidelity, supporting each other, tolerance and the intention to form a family which is the basis of a nation and society. But still these statuses are agreements but not contracts. The other type of transaction which By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 11 Business Law, An Introduction may be an agreement but not a contract is social occasions. for instance, one of your friend may invite you to his/her birthday party but unfortunately, you failed to appear, that friend of yours can’t take you to court for your failure to come to the party, because in these kinds of agreements, there is no the intention to be bound, it is just a social occasion and relationships. The general contract provisions are applicable to any contractual obligations regardless to the nature thereof and the parties thereto. It is not also limited to contract contractual obligation but applicable to other obligations notwithstanding they are contract by nature. Though the applicability of general contract is vast, special provision clearly indicated by other laws should be observed. 2.2. Formation of contract Formation of contract is just the process of establishing or creating or making a contractual relationship with anyone, and in order to form or establish a legally valid contractual relationship, the law requires us to meet or fulfill certain criteria. 2.2.1. Essential elements of formation of a contract The essential elements of a contract which are the criteria or legal requirements to create or establish a contractual relationship are four in number, these are; 1. Consent that each contracting party should show his/her free will to enter in to a binding contract, 2. Capacity that both parties in the contract should have the necessary ability to enter in to that contractual transaction, 3. Object that the subject matter of the contract should be clearly defined, possible to perform, legal and moral, 4. Form that if the law says so that the contract should be made in writing, that legal provision should be respected and observed without any reservation. The first three legal requirements are mandatory that they can’t be set aside and they are also cumulative that all the three should exist at the same time, but the fourth requirement is usually not mandatory, rather it is optional. It will be mandatory when the law specifically directs that certain contracts should be concluded in writing, non compliance with this legal provision may By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 12 Business Law, An Introduction Another concepts should be raised here is the forms how an offer and acceptance are made. An offer and an acceptance may be made orally, in writing, by sign or even by conduct. Most of the transactions are made orally, everyday we inter multiple contracts orally for example, when we use taxi, when we drink tea in the cafe, when we buy consumption goods from mart etc, Offer and acceptance can also be made in writing this occurs when the law clearly says so or when the contracting parties agreed expressly. A public telephone booth, a coca cola machine, use of ATM machine to withdraw money and use of a city bus on the station are clear instances for an offer and acceptance by conduct. This can also be happened, if for example, A offered to buy 100 quintals of corn from B, whether B sends the said amount of corn or writes to A that he has agreed to send the said amount of corn has no difference as the former is accepting the offer by conduct. But the law gives the right to the offeror to specify a special mode of acceptance by the other party. For example, Mr. A orders some merchandise from Mr. B by stating that there shall be no contract unless the goods are delivered at his residence at a specified time. In this case, the mode of acceptance is the delivery of the goods at a particular time. The other forms of offer and acceptance is by sign this includes facial expression to express agreement, Knocking with hammer to celebrate the winner in public auction, raising hands by the bidder in public auction and any other body sign to show willingness to inter a contract. The other most important point worthy of mentioning here is the case of whether or not silence amounts to acceptance. In principle, silence doesn’t amount to acceptance. Silence means not answering to an offer made by any form. But this principle may not apply always as there are situations when silence may amount to acceptance. These exceptional situations are, 1. If there is a duty by the side of the offeree to accept the offer or 2. If there is a pre-existing business relationship between the contracting parties, 3. If there is general terms of business silence may be taken as an acceptance. Let us consider each of the exceptions. The first exception is the duty to accept on the part of the offeree. No express acceptance is required where a party is bound by law to enter in to a contract on terms stipulated in advance. Public utility undertakings are clear instances for this. Telecommunication, water and sewerage authority, the light and power supplying authority, postal and public transport service suppliers are not required to officially accept the offer. They are bound by the law to accept such an offer silently, because a. the service that they provide is vital for the public, and b. their nature of monopolistic that they are the sole By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 15 Business Law, An Introduction service providers in the country. The second exception is pre-existing business relationship between the contracting parties. An offer to renew or vary a prior (previous) contractual relationship or an offer to enter in to a subsidiary contract may be accepted by silence. If the offeree kept silent to the offer for continuation or variation of the already existing contract, or to the offer for entering in to a subsidiary contract12, it will be presumed that he/she agrees; but to apply this exception, the following requirements should be met cumulatively, - the parties should have a prior contractual relationship, - one of the parties must propose the renewal or modification of the contract, - the proposing party should include a warning clause in his/her offer that if he/she doesn’t receive a rejection, the offer will be taken as accepted, and - The offer for modification, variation or continuation of the already existed contract should be made in a special document prepared by the proposing party solely for this particular purpose. For example, ‘A’ leased ‘B’s house since last year for 5000 birr per month. Now ‘B’ has told ‘A’ that the rent money will increase to 6000 birr from next month onwards and ‘A’ kept silent and continued to live in the house. At the payment time, while ‘B’ was ready to collect the 6000 birr, ‘A’ refused to pay as the modification/variation of the lease contract made by ‘B’ has not been made in writing or using the language of the law “the special document”(Article 1684(2) of the Ethiopian Civil code of 1960). The third exception is general terms in principle general terms do not bind a party except in the following two situation: it is binding when the general term is made by the authorities such as Ethiopian Air lines luggage weight in international flight, term in City Bus that obliged a passenger to show his Ticket to the controller. In private business receipt such as dry- leaning the general term binds the person who needs laundry service if he knew and accepted the terms prescribed or approved by authority. Duration of an offer and an acceptance: The other most important issue related with the notion of consent is the time (duration) of an offer and an acceptance. An offer may be made with or with out time limit. Let us consider first offers made with time limit. 12 . A subsidiary contract is a contract which is an accessory to the main contract. For instance, a contract of guarantee is a subsidiary contract to a contract of loan. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 16 Business Law, An Introduction When the offer is made with a specific time limit, unless the offeree rejects the offer before the lapse of that particular time, the offeror is legally bound by his/her offer until the lapse of the already set time limit. In other words, offers made with time limit are irrevocable. E.g. Aster, on the 10th of September 2006, made an offer to sell her LCD television to Kalkidan at a price of 10, 000 Eth. Birr and Aster stipulated a provision in her offer that the offer will be opened for Kalkidan’s reply (acceptance) only until the 10th of October 2006. On the 5th of October 2006, Kalkidan told Aster that she will only buy the LCD television at the price of 9,000 birr. Then, on the 8th of October, Kalkidan changed her mind and calls back Aster and said “all right! I will buy the television at the original price, i.e. at the price of 10,000 birr.” but at this time, since Kalkidan made a defective acceptance by modifying the price, it will be presumed that she totally rejected the offer and Aster will no longer be legally bound by the offer even if the time has not yet lapse and Kalkidan changed her mind. - The second situation is offer made without time limit. If the offer is made without specifying the time of reply or acceptance, it will be opened for acceptance until the lapse of a reasonable time. But how are we going to determine a lapse of a reasonable time? Or what should be our yardstick or criteria to say this is a reasonable time and that is not. We can’t give a clear answer for this as it depends on the circumstances of the transaction. Some transactions upon which an offer is made may be complicated and may require a relatively longer period of time to think about and some may need a fraction of seconds. Therefore, since we cannot have an objective test to decide what is reasonable time and what is not, it is left for the discretion of the judge. Moreover, if the offeror thinks that the acceptance was not made within a reasonable time, the offeror must declare this fact to the offeree, and failure to do so will automatically lead to the presumption that a contract is established or formed between the parties. Contract between absent parties Contracts may not always be made between two parties in person as due to various reasons, people may travel from place to place. Thanks to God and the modern technologies made the relationship between two individuals living in different localities possible. One of these technologies is telephone, a contract made through a telephone conversation is considered to be made between two present parties, and the place where the party was called will be taken as the place of the conclusion (place of formation) of the contract. So, acceptance must be made before By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 17 Business Law, An Introduction ground to invalidate the contract by the side of Mr. A, because it is a fundamental mistake? What about a person sold a commodity to Mr. C but delivers that particular commodity to Mr. D who was the twin brother of Mr. C? Would this be a mistake as to the identity of the person? Discuss! There is also a mistake as to the identity and quality of the object of the contract if for instance Mr. A bought an ethyl alcohol (drinkable alcohol) for dressing his wounds thinking that he was buying methyl alcohol that helps to prevent infection. Or, Miss A sold her ring thinking that she was selling the gold one but actually she sold the brass.  So, if one of the above situations occurs, the party may invoke mistake to bring the contractual relationship to an end (invalidate the contract). In mistake parties, an offeror and an offeree, in the contractual transaction are innocent but the mistake urges a party to give consent. Mistake my occur as result of the identity of a person, for example if A purchased an art by believing which is drawn by Miter artist Afework Tekle, but actually he purchased a paint made by an amateur whose name is Afework Tekele. Such mistake result from the identity of a person qualification may be the ground for invalidation. Mistakes related to motives and arithmetical errors Mistakes which relates to motives or facts motivating the person to enter in to the contract are not sufficient grounds to invalidate the contract as they are neither fundamental nor decisive. For example, Mrs. A’s father concluded a contract with Mr. B for a sale of two Oxen for his beloved daughter’s marriage, but unfortunately the marriage ceremony was cancelled but since the marriage ceremony is a mere motive for the conclusion of the sales contract, the contract should be maintained and Mr. A can’t invoke mistake as a ground to invalidate the contract. Arithmetical errors are not sufficient grounds to invalidate the contract as well as they are just mere errors in calculation and since the parties don’t have any problem with the content of the contract, these errors can be easily corrected. For example the seller agreed to sale 10 package of soap for 100 Eth. Birr each and the total payment indicated in the contract is 10,000 Eth. Birr. The mistake is arithmetic then can be corrected because 10 times 100 is equal to 1000Eth. Birr rather than 10,000Eth.Birr. The law puts such kind of limitations on the concept of mistake in order to protect the contractual relationship and prevent frequent invalidations of contracts so that the transaction may be carried out peacefully and smoothly. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 20 Business Law, An Introduction At this particular juncture, it is proper to raise the question as to who should bear the losses due to the invalidation of the contract by the ground of mistake. It won’t be fair to throw all the losses on the shoulder of the person with whom the mistaken party concludes contract. This party must have incurred some expenses thinking that the contract was valid. Therefore, the party who invokes mistake and became successful to invalidate the contract should not go free rather expected to compensate and share the risk with the loosing party as long as both parties are innocent their wrong appreciation only rush them to inter a contract. The party who is going to be compensated should have a good faith that he/she didn’t know or doesn’t have any reason to know that the other party was committing a mistake. If it is proved that he/she knew or should have known the facts that the other party was mistaken but kept silent, he/she may not be compensated at all. B. Fraud: is just a deceitful practice, or it is an act of deceiving. In other words, one of the parties is cheating. To make it more clear, one of the parties induces another party to give his consent by the former’s fraudulent act. This act is also known a mistake induced by an intention. In mistake proper, there is no an element of intention to cheat on the side of either parties, but in the case of fraud, one of the parties is intentionally misleading the other party to commit a mistake. This act is the other ground to invalidate the contract if it is only practiced (change to reality); if Mr. A obtains a life insurance policy by showing a forged health certificate concealing or hiding the fact that he is seriously ill even near to death. Or a person gets a high position at work by showing false educational documents. Or if some one sold a golden painted metal by persuading the buyer that it is gold. All this acts are acts of cheatings and they are practiced, i.e. some body lost something due to the act of cheating. In addition to invalidation the one who did a fraudulent act also punished for criminal element of the act. Fraud can also be made by third party act if and only if the beneficiary in the contract knew or should have known the fraudulent act of the third party. C. Duress: refers to an act of compelling or forcing some one physically or mentally to enter in to a contract. In other words, it is a force full practice. But in order to be a sufficient ground to invalidate the contract, the act of duress should be serious, imminent and impress a reasonable person, and the act should be intended to be exercised on the contracting party him/herself, on his/her ascendants (parents) or descendants (children), or on the party’s husband/wife as to their life, person, reputation, or property. The act of the duress need not be real and if it seems real to By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 21 Business Law, An Introduction the threatened party, it will be sufficient. In determining weather a person gives his consent as a result of duress or not the age, sex and position of the parties should be considered. For example if a man from Jimma call and threatened some body in Addis Ababa to sign a 10,000 Eth. Birr cheque on former’s behalf and if the later signed it, it is not an amount to duress, it is because though the act is serious it is not imminent as he has time to report to the police or have time to take any other measures necessary to abort the duress. However, in the above example, a man from Jimma warns him that he will tell his wife that he committed adultery or threatened to report to the police that he is corrupted, and as a result if the latter sign a cheque it fulfilled both elements, serious and imminent, and affects his honor so that duress exists in the eye of Law. An act of duress by a third party may also be a ground to invalidate the contract with out considering the innocence of one of the party who benefitted as result of the act of third party duress. If for instance, A is forced by B to enter in to a contract with C, C can’t prevent the invalidation of the contract by arguing that he didn’t exercise the act of duress, but if C can prove that he has no idea whether A was entering in to such contract being threatened by B, C may be entitled to get some amount of compensation. On the other hand, a threat to exercise a right is not an act of duress and can’t be a ground to invalidate the contract unless it is proved that the threat to exercise a right was intended to obtain an excessive or unlawful advantage. For instance, an individual bought a car from another by paying the full amount of the price but the seller delivered the car and failed to transfer the ownership and deliver the ownership title document, i.e. the “Libre”, to the buyer and if the buyer said that unless the seller fulfills his side of the obligation, he will bring a legal action in court, this doesn’t amount to be an act of duress as the buyer is just using his legal right. But if he said “give me my money back and the documents of the ownership title and change the nature of the contract as if it is a gift (contract of donation)”. Now, he is using his right to get an excessive advantage and since this is an act of abuse of a right, it will be a good ground to invalidate the contract. Similarly, fear of ascendants or superior can’t be a ground to invalidate the contract. Lesion (unconscionable contract) is the other ground to invalidate the contract. These kinds of contracts are contracts contrary to conscious. If it is proved that one of the parties took an excessive advantage from the want, simplicity of mind, senility or business inexperience of the other party, the contract may be invalidated. For instance, if a certain country girl with out any By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 22 Business Law, An Introduction party with whom the minor concludes the contract but by the request of the minor or by his/her tutor or guardian ( representative) and his heir. The contract entered by a minor remains valid for some legal reasons. A minor, his/her representatives or heirs can not invoke minority for invalidation two years after a minor attained 18 years (majority). The contract entered into by a minor shall be valid if the good faith of the other party proved that believing a minor has authorization and the person has not taken advantage of the inexperience of a minor. When it is proved that the minor is benefited, payment to the minor remains valid to the extent of minor’s benefit. For example person who is a debtor of a business man paid his debt to the business man minor child after the death of his creditor. If the minor spend fifty percent of the money for school fee and for clothing and the rest half for gambling the debtor liability is to the extent of money which the minor spent for gambling, it is because the minor is benefited partially. When the contract is invalidated as result of minority, the minor is not waived for extra contractual liability and unlawful enrichment the other party incurred as result the action of nullity is instituted. Contractual capacity of insane persons An insane person is someone who can’t understand the importance of his/her action due to mental illness or mental abnormality, insufficient body development, senility. Feeble minded, drunkards, habitually intoxicated persons, prodigals, deaf mute and blinds may also demand the legal protection provided for insane persons. We have two types of insane persons, namely;  Notorious insane persons and  Non-notorious insane persons. Notorious insane persons are persons whose insanity makes him/her to be an inmate in a hospital, institution or a nursing home, or if he/she lives with his/her family or any body who takes care about him/her in a commune of less than 2000 inhabitants and if most inhabitants of the commune considered the individual as insane person due to the care and treatment that he/she gets from his/her parents. Any person who doesn’t fall under the above category is considered to be non- notorious insane person, and mostly lucid intervals are clear instances for this category of non- notorious persons. Effects of insanity on contracts The effect of insanity on contract is determined whether the insane person is notorious or non- notorious. If the individual is a notorious insane person, he/she can invalidate the contract after By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 25 Business Law, An Introduction he/she gets his/her mental health or in the alternative, the tutor or guardian or his/her heirs may request the invalidation of the contract. If the person is a non-notorious one, he/she can’t invoke invalidation of a contract unless he/she proves that his/her consent was not free and true due the mental illness at the time when the contract was formed/concluded. If not, the contract will be maintained as if it is established between two sane persons. The concept of interdiction Interdiction is an act of prohibition or withdrawal of a person’s capacity from performing juridical acts by a court decision. There are two types of interdictions, namely judicial interdiction and legal interdiction. Judicial interdiction is the judgment made by a court where the health and the interest of an insane person so requires. It may also interdiction pronounced for the interest of heirs and creditor of insane person. Judicial interdiction may be pronounced for person who is unable through permanent disability (such as blind person or deaf mute) to govern himself or to administer his property. 2The court assigns a representative for personal and pecuniary interest of the judicial interdicted person. Any contract made by judicial interdicted person Judicially interdicted persons are minors and insane persons and the court appoints for these persons a guardian to take care of the welfare of these minors or insane persons and a tutor to manage their pecuniary affairs. Legally interdicted persons, on the other hand, are criminally convicted and imprisoned individuals. And the court will appoint only a tutor to take care of the pecuniary affairs of the prisoner. The withdrawal of the interdiction shall be pronounced by the court, where it appears that the cause of the interdiction have ceased and the interdiction person is in a position to conduct himself and to administer his property by himself. But what do you think is the reason that the law doesn’t appoint a guardian for a prisoner? Discuss! 3. Object and form of contract: Object of a contract is the subject matter of the contract or the obligation to be performed. Object of contract is an obligation undertaken by the contracting parties. The contracting parties are free to determine the content of the Contract. They can set aside permissive provisions of the law but By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 26 Business Law, An Introduction should observe the mandatory one.13 The object should be sufficiently defined, possible to perform, legal and moral. The object must be defined: a contract is void where the obligation of the parties or of one of them cannot be ascertained with sufficient precision. Here if the contract is not well defined the court not allowed to uphill the contract as the court prohibited from making a contract for the parties under the guise of interpretation. For example “A” agreed to sell his Korea made car to “B” for about 100,000 Birr. This contract is not sufficiently defined because of the price “for about 100,000” is not sufficiently defined. In another example if “A” agreed to do some work with “B” in which the latter agreed to pay 100 Birr. Still the obligation is not defined as “to do some work” is not clearly show the type of work assumed in the contract. The object must be possible: a contract is void where the obligations of the parties or of one of them relate to a thing or a fact which is impossible and such impossibility is absolute and incapable to being surmounted. For example, if “A” agreed to sell his race horse to “B” for 10,000 Birr which is in ‘C’s” custody. However, the horse has already died of car accident a little before the offer is accepted. The contract is not possible to exist as the subject matter of the contract “The horse” not existed at the time of formation of contract. Unlawful and immoral contracts are also void. Unlawful contracts are transactions that are legally prohibited. For example, pirates bought a boat to cease international navigation such type of transaction is illegal and the contract is void. On the same token immoral contracts are void though they may not be illegal yet cursed by a community. Form of contract is the other element of a valid contract. The principle is freedom of form that parties may opt to make a special form, i.e. if they wish they can make their contract in writing. But this principle of freedom of form, like any other legal principles, has two exceptions that formal requirement may be mandatory. These are;  If the parties agree orally that they will make their contract in the future in writing, they should observe this pre-contractual agreement. 13 . Permissive provisions are provisions of the law which gives us the right to chose to do or not to do a certain act and can be disregarded, where as mandatory provisions are quite the opposite and as the term “mandatory” it self indicates, they are obligatory and can’t be set aside or disregarded. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 27 Business Law, An Introduction Assume that A and B concluded a contract in which A offered to sell his gold bracelet that he inherited from his mother to B for 2000 birr believing that the object is a genuine gold bracelet, and B has agreed to pay the said amount of money. Later on, B took the gold to make sure whether or not the bracelet is a 21 karat gold, unfortunately however, he was told by the gold- smith that it was not a gold bracelet at all but silver. Therefore, the mistaken party; i.e. B can request the invalidation of the contract within two years from the time when he knew that he was mistaken. Assume that A and B concluded a contract according to which A assumed the obligation of collecting and bringing minor children from rural areas and B assumed the obligation of training them begging. Such an agreement is illegal and may be invalidated at the request of either of the contracting parties or by any interested third party. Performance of contract Performance of contract refers to the act of carrying out the obligation imposed upon the parties by the contract. Under this section, we will try to look at the ways and methods of performance of contractual obligations. Who should perform? Who shall receive the performance? Or for whom should performance be made? What should be performed? Time and place of performance and non-performance of contractual obligations and its remedies are going to be briefly discussed. - Who shall perform a contract? As a rule, the debtor may or may not be expected to perform the obligation him/herself. In other words, the debtor may perform the obligation personally or in the alternative, he/she may authorize another individual to perform the obligation. Furthermore, performance by third parties may also be authorized by court decision or by the simple operation of the law. The father and mother are, during their marriage, jointly guardians and tutors of their minor children. (Article 204 of the Ethiopian Civil code of 1960), this clearly shows that they are the legal representatives of their minor children and can represent them and perform any obligation on their behalf. The guarantor and the co-debtor can also perform the obligation of the debtor being authorized by law or by court decision. However, there are a couple of conditions where the debtor may be required to perform the obligation personally if the creditor shows that the nature of the obligation needs personal performance of the debtor him/herself and personal performance of the debtor is expressly agreed. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 30 Business Law, An Introduction For instance, if a certain famous singer in the town concludes a contract with a certain hotel owner in that particular town to entertain the guests and if the singer, due to various reasons, couldn’t perform his obligation, do you think he can authorize his daughter or son or a friend to perform his obligation? No, because such kind of obligation, by nature, needs the personal performance of that particular singer. If for instance a famous painter assumes the obligation to paint our house, he/she can’t authorize any one as we hired him/her seeing his/her professional skill, experience and efficiency. Therefore, such kinds of obligations are special which requires the personal performance of the debtor. In other situation if the creditor expressly demands the debtor to pay his debt to the creditor and not for other person even a person is an agent of the creditor the debtor may not be relived from the obligation he/she has incurred. However If A demands his son to buy a kilo of sugar from any near by shop, it has no difference if he bought from C’s or B’s Shop unless the father expressly ordered his son to buy either C’s or Bs shop. - Who should receive performance? Or for whom should performance be made? Again as a principle, the creditor or any other person authorized by the creditor may receive performance of contractual obligation. But what about if the creditor is not capable to receive such performance, i.e. the original creditor could be a minor or an insane person or an old aged or a prisoner or a senile. It is obvious that performance made to such kind of incapable persons is not valid before the eyes of the law and the debtor may be required to double performance. But what if the debtor proved that even if he/she made performance to an incapable creditor, the incapable creditor benefited enriched by the performance of the obligation, the debtor may escape from double performance to the extent of enrichment. For instance, if the debtor has returned the money which he had borrowed from Mr. A’s, a 16 years old boy, family to the boy as his family passed away, the debtor’s performance of the obligation, i.e. repaying the loan to an incapable creditor is not valid, but if he can prove that the minor purchased different clothes and shoes using the money, more or less the minor is benefited so the debtor may be relieved. For instance, A is a minor who received 4000 birr from B who was the debtor of A’s deceased parents. Out of the money, A spent 1000 birr for his clothing, 1,200 birr on gambling and 1000 birr for his school fee and the rest for food. At this particular juncture, when the tutor of A claimed the repayment of the money by invoking that the previous payment made to the minor is not valid, B may raise as a By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 31 Business Law, An Introduction defense that the minor has benefited to the extent of 2800 birr by excluding the amount of the money spent on gambling. In the above hypothetical case, if the minor spent 1000 birr on gambling, 1000 birr for smoking, and another 1000 birr for drinking alcohol and with the remaining amount of money, he bought a play station and obtained 400 birr per month for ten months consecutively by letting others’ play the game, would you advise B to raise this fact as a defense against the tutor who has claimed the repayment? Discuss! Whenever the debtor is in difficult situation to identify who is the proper creditor, the law advised him to pay to no one, but he will be relieved from his obligation by depositing the amount due with the court. - What should be performed? The debtor should perform his/her obligation under the contract exactly. In other words, the performance of the contract by the debtor should be in conformity with what was exactly and clearly promised. If the performance is not in conformity with what was exactly promised, the law entitles the creditor to refuse performance, or to suspend his/her side of obligation or to exercise any other legal remedies of non-performance. The creditor may also refuse part payment, however receiving part do not tantamount the creditor lose the unpaid part. There is a say “Better half than nothing”. Taking half does not prevent the creditor to claim the unpaid one. When fungible things, things that have common generic name but different species such as teff, coffee etc, ordered the debtor has the right to choose the thing to be delivered however the creditor has the right to refuse to receive below average quality. This shows that when sometimes the obligation is not defined sufficiently the law fills the gap to settle such types of disagreements of the contracting party. In other situation if debt is money debt, it should be paid in local currency unless the contract contains the word like “actual value”. What interesting concept included in the future payment of the debtor to protect the interest of either the creditor or debtor is the payment relies on the future price of the goods or services at the time of payment. For example, A borrowed 5000 birr five years ago, at the time the price of gold 500 birr/gm that means the debt can purchased 10gm of gold. Now at the time of payment the price of gold is 1000 birr/gm that means A has to pay 10,000 birr because at the due date the price to purchase 10 gm of gold is 10,000 birr. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 32 Business Law, An Introduction damage and the second one is cancellation of the contract as a whole with compensation for damage. The creditor may require the debtor to perform the contractual obligation if;  The creditor has a special interest from the personal performance of the obligation by the debtor, AND  If the performance of the obligation doesn’t violate the personal liberty of the debtor. Assume that A, the famous artist/singer has agreed to perform in the concert arranged by B promotional agency to the public at Exhibition Center, as a result, the promoter has sold entrance tickets. However, just a day before the concert date, A sadly informed B that he will not be able to perform the concert and provided no reason. Under such a circumstance, do you think specific performance is possible? Please bear in mind that the above two requirements must exist cumulatively (together) in order to apply specific performance as per article 1776 of the Ethiopian Civil Code. Some times, the court may give an order to the creditor himself to perform the obligation of the debtor at the latter’s expense or destroy what has been done by the debtor against forbearance at the expense of the debtor. This is called an order of self-help. The debtor may also be ordered by the court to deposit the thing that he has agreed to deliver, when the creditor fails to take delivery, in public warehouse, in a bank or at any place that is convenient. For things perishable and the cost of deposit is expensive, the debtor and the guarantor, if there is any, will be relieved. In general, due to the non-fulfillment of the above mentioned requirements or for any other reason, specific performance is not possible, the creditor may apply to the court for cancellation of the contract or some times even the individual creditor may be allowed to cancel the contract individually. We have two types of cancellation, namely; i. Judicial cancellation, which is the rule that the court may give an order of cancellation of the contract only where there is a fundamental breach. There will be a fundamental breach when the non-performance affects the very basis of the contract and the non-performance is total and irreversible. e.g. Mr. A destroyed the latest and modern video camera which he sold it to Mr. B. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 35 Business Law, An Introduction ii. Unilateral cancellation is the other type of cancellation which gives the right to one of the parties to cancel the contract unilaterally. Unilateral cancellation will be allowed if one of the following conditions is fulfilled. These are; - If the parties have agreed, in other words, if there is a cancellation clause in their contract, OR - When the period of grace or the reasonable time has already lapsed, OR - If the performance of the contract, due to some reasons, becomes impossible, OR - If the other party has already declared in writing that he/she will not perform his/her obligation. Assume that A ordered an ivory from B’s souvenir shop and B agreed to sell each tusk for 5000 birr. The date of delivery is in one moth time from the conclusion of the contract, in the mean time, however, a government regulation has been issued that prohibits hunting of elephants as a result of which performance became impossible and A can unilaterally cancel the contract without the need of taking it to court. - Compensation for damage In addition to requiring forced (specific) performance of the contractual obligation or cancellation of the contract as a whole, the creditor may apply for compensation for damage. Damage is a loss or an injury caused by one person to another. The creditor (the plaintiff) will be awarded compensation for damage if two requirements are fulfilled. These are;  If it is well proved that the creditor (plaintiff) suffered a damage, in other words, it must be proved that the creditor lost something, and;  It must be also proved that the creditor suffered the damage (incurred the loss) due to the defendant’s (debtor’s) non-performance of his/her obligation. The defendant (the debtor), on the other hand, may be relieved from paying compensation for the damage if he/she proved that the reason for the non-performance of the obligation is due to force majeure. A force majeure is an event which is unforeseeable (something which can’t be foreseen or predicted) and insurmountable (something which is beyond our control and unavoidable). The law clearly states that there is such event in times of;  Unexpected government prohibition, or  The existence of natural catastrophe such as flood, lightening, earth quake, etc…or By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 36 Business Law, An Introduction  international or civil war, or  The death or unexpected grave accident or illness of the debtor. If the debtor proved that one of the above mentioned situations occurred and prevented the performance of the obligation, he/she may be free (may not be legally obliged) to pay compensation to the creditor. Extinction of contractual obligations Contractual obligations are normally extinguished through “performance” in accordance with the contract and the law.14 There are, however, other ways in which a contract and the obligations created by it can come to an end.15 These reasons, other than cancellation, invalidation and period of limitation that we’ve discussed above, are Novation, Merger, Set-Off and Termination of the contractual obligation.16 Let us now address each of them very briefly as follows. Novation Novation is defined as the substitution by mutual agreement of one debtor or of one creditor for another where by the old debt is extinguished or the substitution of a new debt or obligation for an existing one, which is thereby extinguished.17 This is the other method of extinguishing obligations that consists of replacing an old obligation by a new one and the new obligation may differ from the old in its object.18 Illustration: Tewabe owes Tekabe 1,000 birr for some goods the former purchased from the latter; nevertheless, both parties, later on, have agreed in a new contract that Tewabe will keep the 1,000 birr as a loan from Tekabe. In this simple example, the previous contractual obligation between the two parties; i.e. contract of sale is now extinguished (brought to an end) as it is replaced by a new contractual obligation which is a contract of loan. Therefore, the previous contract is replaced by the new one and according to such; the previous buyer has now become a borrower. For a novation to come to the 14 . David, Rene, Commentary on contracts in Ethiopia, Translated by Michael Kindred, Faculty of Law, HSIU, Addis Ababa, 1973, pp. 77 15. Id. pp. 78. See also Art. 1806 and Art. 1807 of the Ethiopian Civil Code. 16. See Art. 1807 (a)-(f) of the Ethiopian Civil Code 17. Aiyar, P. Ramanatha, Concise Law Dictionary, 3rd ed., (2006), pp. 796 18. David, Rene, Op. Cit., pp. 84 By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 37 Business Law, An Introduction parties; this situation is known as judicial termination.28 Along side with termination, remission of debt is also another ground to extinguish the contractual relationship between the creditor and the debtor. Remission of debt means reduction or total forgiveness of the sentence or debt of the one who has the duty to perform it.29 Remission of debt is a unilateral action; i.e. it discharges one party from his/her obligations without regard to any performance the other party may have provided or still owes.30 Usually, especially looking at the systems of other countries, before a remission of debt can extinguish an obligation, it must be accepted by the debtor, however, since it is economically advantageous for the debtor, the Ethiopian civil code of 1960 reverses this traditional rule and that if the debtor simply kept silent, that will amount to acceptance of the remission of debt as per art. 1825 of the civil code. But, if the debtor intends to reject the act of remission by the creditor, he/she (The debtor) must inform this immediately to the creditor. To come to a general conclusion, a contract can be established to create a new obligation, to modify an already existing obligation, or to bring an obligation to an end (to extinguish an obligation). So far, we have been discussion all these situations of creation, variation and extinction of contractual obligations in a very brief manner by giving illustrations. Please bear in mind that the principles and concepts that we’ve raised so far are general rules applicable in all types of contracts in Ethiopia unless there is a special rule governing some special contractual relationships stipulated in the law it self. Now let us look at in the preceding chapters some of these special contracts and special principles governing them. Before that, however, there are some review questions that you are required to attempt so that you can test yourself as to how you have grasped the ideas mentioned above. Review questions 1) What is a contract? 2) What are the essential requirements of a valid contract? 28 . With regard to unilateral termination, see arts. 2226 and 2229 of the civil code that talk about the unilateral termination of agency-principal relation ship. The former stipulates the discretionary power of the principal to revoke the power that he/she has given to the agent where as the latter talks about the right of the agent to renounce the power that he/she got from the principal. Regarding judicial termination, refer to art. 1823 and art. 1824 of the civil code that give the power to terminate the contract upon the application of one of the parties in the existence of a special relation between the parties and in cases of gratuitous contract like contract of donation. 29. Aiyar, P. Ramanatha, Op. Cit., pp. 1005. To remise means to release a claim or to surrender. 30. David, Rene, Op. Cit., pp. 84 By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 40 Business Law, An Introduction 3) Ato A sent an offer without time limit to Ato B by mail. Ato B mailed back a letter of acceptance. However, A never received the letter due to the fault of the post office. A argues that there is no contract since he never received the letter where as, B proved that the letter was properly addressed, stamped and mailed. Do you think there is a contract? Why or why not? 4) What kind of mistake may be a ground to invalidate a contract? 5) Solomon is a well-known trader in the town of Shashemene engaged in manufacture and sale of leather garments and T-shirts. On February 10/2010, he manufactured 100 T-shirts in his plant. The cost of production for the manufacture was 11,000 birr; however, Solomon miscalculated the cost of production as 7,000 birr only. As a result, Solomon agreed to sell all the T-shirts to Zenebe each at a price of 100 birr. In the contract concluded between them, it was agreed that Zenebe should pay 8,000 birr. Later on, Solomon demanded the invalidation of the contract on the following two grounds. State whether each of the grounds amount to sufficient reasons to invalidate the contract or not with explanation. - Solomon argued that the contract has to be invalidated since the total price of the T- shirts is stated as 8,000 birr when it was supposed to be 10,000 birr. - Solomon went far and argued that the contract should also be invalidated since he has committed an arithmetical mistake when he calculated his cost of production as 7,000 birr when it was supposed to be 11,000 birr. 6) Ato Maru lent birr 600 hundred to Ato Ali. While paying back the debt, Ato Ali found Maru’s twin brother, Tesfaye. Ali, assuming that Tesfaye is Maru as it was impossible to differentiate Maru and Tesfaye and apart from parents, no one could distinguish the two, paid the money to Tesfaye. In such a situation, due to the payment made to Tesfaye is valid? Why or why not? 7) What is a capacity? 8) What is performance of a contract? 9) What is the difference between cancellation and invalidation of contracts? 10) Discuss the situations where by the debtor may not be legally obliged to pay compensation for damage to the creditor. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 41 Business Law, An Introduction 11) “Forma dat esse rei” i.e. form gives existence to the transaction. Explain. Chapter 3 Special contracts In our discussion regarding the general legal provisions, which governs contractual relationships of one or more persons, we have tried to see some basic principles and concepts applicable to any type of contract. Under this chapter, we will try to see two kinds of special contracts governed under the Ethiopian civil code, i.e. contract of sale and contract of agency, and bear in mind that the general provisions of contracts we have seen under the previous chapter are also applicable in special contracts when ever it is necessary. Let us now first consider contract of sale and the legal provisions that governs it. 3.1. Contract of sales 3.1.1. Definition of sales contract As usual we will start by defining what a contract of sale is legally. The law defines a contract of sale under art. 2266 of the Ethiopian civil code as a contract where by one of the parties, the seller, undertakes to deliver a thing and transfer its ownership to another party, the buyer for a consideration in price expressed in money which the buyer undertakes to pay him(to the seller). From the above definition of sales contract, we can easily identify the following main elements of the definition. These are, a. A sale contract is a contract, there fore, it must fulfill all the requirements of a valid contract, i.e. the parties to this contract must express their full and free consent, they must be capable to enter in to such transaction, the object of the sales contract must be sufficiently defined, moral, legal and possible to perform. b. There must be at least two parties in sales contract, i.e. the seller on one hand and the buyer on the other. The seller assumes the obligations, - First to deliver the thing that he/she has sold to the buyer, and - Second, to transfer the ownership title to the buyer. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 42 Business Law, An Introduction price. In other words, the seller shall deliver the thing as soon as the buyer requires him/her to do so upon payment of the agreed price.34  The other apparent obligation of the seller is the obligation to transfer the ownership title of the thing to the buyer. The seller is expected to transfer the ownership title of the object that he/she had sold to the buyer. This can be done by handing over simply the thing. There are some special corporeal chattels which even require additional formalities for the transfer of ownership. these types of corporeal movables such as motor vehicles, air planes, ships, TV sets and the like registration in addition to the conclusion of the contract delivery of the thing. So the obligation of the seller to transfer the ownership title of such types of special corporeal chattels includes the handing over of the document which attests the title of ownership in addition to the handing over the actual commodity. One thing which should bear in mind here is that no one can transfer what he/she doesn’t own35, if the owner ship title of the owner is defective, the transferee’s title will also be defective. but if the buyer had a strong belief that the seller had a full ownership title to sell the thing, the ownership title of the buyer will not be defective provided that the buyer; paid the full price, has the intention to acquire ownership, has a good faith that he (the buyer) has a strong trust on the title of the seller, and received possession. Good faith on the part of the buyer is always presumed. if the other party is alleging that the buyer didn’t have good faith at the time he/she purchased the thing from the seller, this party must prove his/her allegation. This kind of ownership is known as ownership by acquisition. However, ownership by acquisition won’t apply in special movables like car, airplanes, ships, TV sets, etc…  The third type of obligation of the seller, which is not apparent from the definition of sales contract is the obligation to give warranty for the commodity that he/she had sold. Before starting our discussion concerning the obligation of the seller to give warranty under Ethiopian law of sales, let us see some theoretical concepts regarding warranty in general. A person who buys goods after having inspected them or had the opportunity to inspect may not complain later of defects that could have been detected by ordinary inspection, 34. Id 35 . This principle is based on the Roman law theory nemo dat qui non habet, i.e. no one can give what he has not. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 45 Business Law, An Introduction this theory in Latin called Caveat Emptor, i.e. let the buyer beware, this theory is a very old theory that it was applicable in countries like G. Britain, U.S.A. and other common law countries. According to this theory, if on the part of the seller, no fraud has been committed, the buyer him/herself will be blamed if he/she fails to investigate the defect of the thing, this theory was applicable in ancient times where there were no that much complicated commercial activities and where parties knew each other. The other theory which is applicable in modern commercial transactions is known as Caveat Venditor, i.e. let the seller beware. In to day’s complicated commercial activities, sellers have no much opportunity to directly investigate the goods as it passes in to many hands before it reaches the consumer, and the underlying principle of the obligation of warranty is this principle of Caveat Venditor. This obligation refers to a promise that a proposition of fact is true. The seller should give warranty first, the object sold is in exact conformity with the contract, and secondly, the object is free from defects. There are two types of warranties, namely express warranty and implied warranty. Express warranty is a warranty stipulated in the sales under which the seller assures the quality, description or the performance of goods. In other words, the buyer bought the goods on a reasonable assumption that the goods are as described by the seller. Implied warranty is the other type of warranty imposed on the seller by the operation of the law. The law requires that the seller should provide certain minimum standards of quality and performance even if no explicit promise or representations are made. this warranty may be either warranty of title that the seller has the proper title to sell, or warranty of merchantability that the goods are merchantable or usable if the buyer wants to resell it after using it, or a warranty of fitness for a particular purpose that the good should be reasonably fit for the purpose which is bought, or a warranty against infringement (encumbrances) that the seller must assure the buyer that the goods are free from a right full claim of any third party. For instance, A sold her phone to B for 1000 birr. A should warrant for the peaceful enjoyment of the buyer without the risk of dispossession, and again, A should warrant the normal function of the cell phone to call others and to receive calls from others. If someone bought a racehorse, the horse is expected to have the necessary fitness for the purpose for which it is bought. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 46 Business Law, An Introduction 3.1.3.2. Obligation of the buyer  The first and apparent obligation of the buyer is the obligation to pay the price. The price of the item may be ascertained by the contract, but if there is no agreement in the contract as to the determination of the exact amount of price, it will be ascertained by a third party valuer, by weight, by current prices or by the price at which the seller normally sells. The obligation of the buyer to pay the price includes the obligation to take any step provided by the contract or by custom to arrange for or guarantee the payment of the price. The buyer may be compelled to accept a bill of exchange to open a credit account, to provide a bank security or otherwise.  The second obligation of the buyer is to take delivery of the thing that he/she has bought from the seller. The buyer is required to take such steps as are necessary to enable the seller to carry out his/her obligation to deliver the thing. If the buyer doesn’t appear at the place agreed on time of delivery, that particular buyer will bear the risk of loss or damage to the thing after he/she was duly notified. The buyer will also be liable for the expenses that the seller had incurred for the preservation of the thing on behalf of the buyer. 3.1.3.3. Common obligations of both the seller and the buyer The common obligations of both the seller and the buyer include expenses, obligations to preserve the thing and transfer of risk. Expenses: - there are different types of expenses which are expected to be covered by both the buyer and the seller. The buyer is expected to cover expenses incurred for the conclusion of the contract, expenses of payment and expenses of transport. how ever, the buyer may not be compelled to cover contract expenses of payment if the seller has changed his/her address or place of business after making the contract, in this situation, the seller will bear the risk of covering the expenses of payment. In addition, the seller will assume the obligation to cover expenses of delivery and custom duties. Obligation to preserve the thing: - the seller must preserve the thing where the buyer is late in taking delivery. In this situation, the buyer is no without obligation, rather, he/she will be obliged to cover the cost for the preservation of the thing. The buyer has also the obligation to preserve the thing when he/she intends to return the thing to the seller on the ground of non-conformity to the contract or defect in the thing. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 47 Business Law, An Introduction name of the principal and for the exclusive interest of that particular principal. Agency contract has a special feature which differentiate it from any other contracts that it has a trilateral effect, i.e. it has a contractual and legal effect on the principal as it creates a right and an obligation on the principal, it has a contractual and legal effect also on the agent as it also creates a right and an obligation on the agent and it has the same effect on third parties. In agency transaction, we have two contracts, i.e. the contract between the agent and the principal which is the agency contract and the contract between the agent and third parties which is the main contract. The agent is an intermediary that he/she is just a bridge on which the principal and third party/ies may come together. After the formation of the main contract between the agent on behalf of the principal and third party, the respective rights and obligations arising out of that particular main contract will be assumed by the principal and the third party, and the agent, since he/she accomplished his/her mission, will be out of the picture of the transaction. But, this may not be so always that there are some exceptions that the agent may be liable to third parties. One of such exceptions is if the agent acts beyond the scope of his/her power. We have various types of agents, i.e. commission agents, commercial agents, forwarding agents, Del credere agents. Among this, later on we will try to consider the concept of commission and commercial agents in a very brief manner. 3.2.2. Sources of agency Power of agency can be derived from the law, contract or from the court. When the agent is appointed by a written contract or simply by oral agreement by the principal, we say the source of the agency power is contract. But if the individual representative is appointed by the mere operation of the law, the authority is derived from the law. Such kinds of representatives are tutors, guardians and succession liquidators.37 The other type of agent whose authority emanates from the law is a curator. This curator is appointed by a court to accomplish some specific acts on behalf of another person upon the application of the relatives of the person or his/her spouse. (Read arts. 2253 and 2254 of the Ethiopian civil code). 3.2.3. Scope of agency 37 . Succession liquidator is a person who is authorized by law to liquidate the estate of the deceased person, how much it is and whether or not free from any kind of debt, and determine the heirs or legatees who are called to take the inheritance. (Read art. 942 and ff articles and art. 946 and ff articles of the Ethiopian civil code of 1960). By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 50 Business Law, An Introduction The scope of the agency power may be expressly fixed in the contract by the contracting parties. But if it is not fixed in the contract, such scope can be determined based on the nature of the transaction to which it relates. And accordingly, the scope of any agency contract may be either general or special. a) General agency: - a general agent is authorized to transact all of the principal’s business of a particular kind or all of the principal’s business at a given place. Agency expressed in general terms shall only confer upon the agent authority to perform acts of management. What are these acts of management? the law clearly defined acts of management as acts done for the preservation and maintenance of property, leases for terms not exceeding three years, the collection of debts, the investment of income and the discharge of debts, the sale of crops, goods intended to be sold or the sale of perishable commodities of the principal. If for instance, the principal appoints the agent using the words “in all my affairs” or “...…is my agent” simply without specifying the authority, it will be taken as a general agency. b) Special agency : - a special agent is appointed to do some specific acts or to transact certain business affairs. Special agency shall be required when the agent is called upon to perform acts other than acts of management. Special Agency includes to transfer (sale or donation), to mortgage immovable properties, to invest capital, to sign bill of exchange, to appear before court etc. requires special authority. If, for example, A authorized B to sell his house, the authority should be made expressly to the sale of that particular house as the principal has given to the agent the widest right that affect his ownership right. In the same token, an authority to establish a right on an immovable property such as mortgage, servitude, and anticresis ( ወለድ አግድ) require special formality so as in the case of leasing an immovable property exceeding three years. Let us now consider the respective duties of the principal and of the agent. 3.2.4. Duties and liabilities of the principal Since agency is a contractual relationship, it necessarily creates rights and obligations on both parties, i.e. on the principal as well as on the agent. The following are the basic obligations (duties) of the principal. i.The first duty of the principal towards the agent is contractual remuneration as the principal is duty bound to pay the agreed payment to the agent for the act that the agent accomplished. But if they don’t have any agreement as to payment of remuneration, the principal may not be obliged to By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 51 Business Law, An Introduction remunerate the agent. This amounts to that the agent agreed to perform acts on behalf of the principal for free. But, though there is no agreement as to the payment of remuneration, if the agent performs the act within the scope of his/her professional duties or if there is a custom in that particular locality where the contract is formed or where the agent performs the act as to payment of remuneration, the principal will be legally obliged to pay the remuneration to the agent. Again, there is a custom as to the payment of remuneration but if both parties failed to agree as to the amount of the remuneration, the court shall fix the amount based on the customs and usages. ii. The second duty of the principal towards the agent is reimbursement that the principal has the duty of advancing sums necessary for carrying out the agency activity. Where the principal has not advanced to the agent any money, and due to which the agent incurs expenses, the principal shall reimburse outlays made and expenses incurred by the agent in the proper carrying out of the agency. The principle is there fore, the principal is under a duty to repay (reimburse) the agent for any disbursement and expenses necessary for the proper discharge of assigned duties. The principal may not be, how ever, legally obliged to repay any expenses which the agent incurred due to his/her own negligence or the expenses were incurred for illegal purpose. iii.The third duty of the principal towards the agent is indemnity that the principal is duty bound to indemnify the agent if the agent sustained any losses or damages while acting on behalf of and for the interest of his/her principal. However, the losses or damages must result directly from the execution of an authority granted. So long as the agent acts within the scope of the authority given by the principal, the principal is liable to third parties for the performance of any contract made in the name of the principal. But if the act performed by the principal is beyond the scope of the agent’s authority, the principal shall not be obliged unless he/she (the principal) ratified it. Consider the following example Mr. A authorized Mr. B to lease Mr. A’s house only for three years of time and left abroad. When Mr. A came after a stay for ten years he found out that his house is still leased. In the above example, Mr. A will not be liable for the seven years of rent as the agent acts beyond the scope of his authority. But if Mr. A ratifies or approves the fact that Mr. B leased the house for ten years, he (Mr. A) will be liable to third parties and Mr. B will be presumed as if he acts within the ambit of his power. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 52 Business Law, An Introduction relationship between the principal and the substituted agent shall be as though the substituted agent had received the authority to act as an agent directly from the principal, where the substituted agent had reasons to believe that the agent was authorized by law or by the approval of the principal to appoint a substitute. In another situation, the agent may delegate when there are such usages, for example sub contracting is a usage because the contractors forward some activities like installation, labor, painting, structure design, soil examination etc to different professionals. Therefore, what we can understand from the above discussion of respective duties of both the agent and the principal, the rights of the principal are the duties of the agent and the opposite is also true. The agent is personally liable to third parties if he/she acts without authority, in other words, if the agent exceeds the authority given to him/her by the principal or if he acts beyond the scope or ambit of his/her power. The agent will also be liable for torts, i.e. for committing wrong acts even though he/she acts within the scope of his/her authority. Assume that A, the principal, appointed B, the agent to lease his house only for three years. B has met with a very wealthy man who showed an interest to rent the house for 20,000 birr per month for six years which B has never imagined. B was so delighted and leased the house for six years for the price offered by the rich man. A came to learn such an act of his agent; i.e., leasing the house for six years is beyond his scope of power. Would you please raise the rights of A and possible defense/s of B, if there is/are any? To give you another example, A needs to buy a very fancy residential house and appointed B for such a purpose; i.e. to buy the said house on behalf of A for a fair price. After some days, B, the agent concluded a contract of sale of a house with C to buy C’s house for 800,000 birr and more over, B and C negotiated to inform A that the cost of the house is 900,000 birr in the intention of obtaining extra sum of money for their own personal advantage. A paid the said amount; i.e. 900,000 birr and begun to live in the house. One day, A heard that the actual price/value of the house was not 900,000 birr but 800,000 birr. What kind of right/s do you think A will have? 3.2.5.2. Joint liabilities of the principal and the agent Both the principal and the agent shall be jointly liable; a) where the principal informed third parties of the existence of the power of agency but failed to inform these third parties of the partial or total revocation of such power; OR, By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 55 Business Law, An Introduction b) where the principal failed to ask the agent to return the document evidencing the power of agency or failed to seek a judicial decision to the effect that such document is revoked, OR, c) Where the principal caused, in any other manner, in particular by his/her statements, behavior or failure to act, a third party to believe that the person with whom he/she was dealing was authorized to act on behalf of the principal. The notion of unauthorized and undisclosed agency As we have discussed earlier, agency proper exists where the principal, either expressly or impliedly, authorizes the agent to act on behalf of the principal. Again, as a rule, the agent should use the name of the principal in all his/her dealings with third parties. But sometimes, the agent may not be expressly or impliedly authorized, a clear instance for such is the institution of unauthorized agency. again, some times, the agent may be allowed to use his/her own name in dealings with third parties by representing the principal for various reasons, the institution of undisclosed agency is a clear example of such kind of agency power. Let us see these two institutions as follows. 1. Unauthorized agency occurs where a person who has no authority to do so undertakes with full knowledge of the facts to manage another person’s affair without having been appointed as an agent. The acting person shall manage the affairs he/she has undertaken with the same care as a good father of a family and should bring the management of the affair to an end and should render accounts to the person on behalf of whom he/she is acting. there is the institution of unauthorized agency where the consent of the person on whose behalf the act is done is non-existent, where the acting person is with the full intention to manage the principals affairs without authority, where the acting person done both juridical and material acts and most importantly, where the act is done for the exclusive interest of the person for whom the act was done. if the above requirements are fulfilled then the person for whom the act was done will assume the duty to ratify the acts done by the acting person in his/her name, indemnify the acting person for all liabilities he/she (the acting person) personally undertook, reimburse the acting person any expenses incurred in his/her (the person for whom the act was done) interest, and compensate the acting person for any damage he/she (the acting person) suffered in connection with the By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 56 Business Law, An Introduction management where such damage sustained due to a fault other than the acting person’s. If there is a duty on the part of the person for whom the act was done to ratify the acts of the acting person, the provisions of agency proper will be applied. Consider the following example, Mr. A left for a vacation leaving his ramshackle house behind, and not long after his departure, a strong wind came and destroyed that house and Miss B the neighbor of Mr. A repairs the house by spending some expenses. In this situation, Miss B is an unauthorized agent and upon arrival, Mr. A will be obliged to ratify the acts of Miss B provided that all the above mentioned legal requirements are fulfilled. 2. Undisclosed agency occurs when the principal is not known as the agent uses his/her own name but acts for the exclusive interest of the principal. for instance, if the prime minister or the Pope wants to engage themselves in a typical commercial activity, and if they want to appoint an agent, it wouldn’t be proper if the agent to use the name of the principal as such involvement of these kind of public figures in a commercial transaction may create unnecessary chaos, so the principal will only use his/her own name while acting in the principal’s interest. In these situations, as a rule, third parties may not require the principal to perform his/her side of obligation and their legal and contractual obligation will only be with the agent even if, by chance, they know who the principal is. to come to a conclusion, as we have discussed in the previous sections of this material, we have said that the agent should be either expressly or impliedly authorized or appointed by the principal and the agent must not use his/her own name but the name of his/her principal. But as we have seen above the agent may not be always authorized and the agent may be allowed to use his/her own name instead of the principal’s if the circumstances so justifies. 3.2.6. Termination of agency Literally, termination is an act or a process of bringing some thing to an end. Legally, the word refers to the act or a process of bringing contractual relationships of the parties. Since the principal- agency relationship is a mere contractual relationship, it can be terminated either by the act of the parties or by the mere operation of the law. Revocation and renunciation are deemed to be acts of the parties to terminate the relationship, where as termination due to the death, incapacity, declaration of absence or bankruptcy of either of the parties are deemed to be termination by the mere operation of the law. Let us now consider each one of them as follows. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 57 Business Law, An Introduction As usual, Let us start our discussion by defining the term business. Art 124 of the Ethiopian commercial code of 1960 tries to define the notion of business as an incorporeal movable consisting of all movable properties brought together and organized for the purpose of carrying out any of the commercial activities specified under art. 5 of the commercial code. By “Commercial Activity”, it means what a person is engaged in professionally in an activity with the intention to gain and a person who is engaged in such an activity is called a trader (a business man). More over, companies like PLC (Private Limited Company) and SC (Share Company) by all means are entities engaged in commercial activities. The question paused here is “Are these commercial activities in the commercial code illustrative or exhaustive”? It seems exhaustive as it doesn’t give a room for other activities to be considered as commercial activities. Nevertheless, in modern times, activities, which were not considered as commercial activities such agriculture, forestry, fishing and handcrafting when they are employed in large scale and harvested mainly for the purpose of maximizing profit, categorized as commercial activities. For instance, floriculture, diary, cash crops and so on… are, now-a-days, a good source of investment and capital accumulation for the trader in particular and for the whole country in general. The fact that agriculture, fishing, forestry and hand crafting had not been taken as commercial activities is due to the reason that they were exploited only for means of subsistence of people’s day to day life not for gain. A trader, in general, operates a business and carrying out a business or several businesses as an owner, usufructuary or lessee. 4.2. Elements of Business A business consists of both corporeal and incorporeal elements. These are: a. Good will and incorporeal elements/components, and b. Corporeal elements/components. a. Good will and incorporeal components :- - Good will: - is one of the main elements of business. “The good will results from the creation and operation of a business and is a value which may vary according to the probable or possible relations between a trader and third parties customer who may require from him goods and services.” It is a test, durability, brand, geography that impressed customers/consumers [Emphasis ours] Article 130 of the Ethiopian Commercial code. There are many products in the world market praised for their qualities and create an impression in peoples mind. It is possible By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 60 Business Law, An Introduction to mention good will of products such as carpet of Persia, wine of Paris, whisky of Scotland and the like. Can you mention some goods in our country that have been remembered for their good will? The source of good will is the capacity of a trader and a trade to retain customers’ demand perpetually. Good will includes the kind of product, provision of services, trader’s relationship with the employees and economic stability. Unfair competition: to build a good will is not an easy task. However, to defame and to discourage it doesn’t need that much effort, and this is why unfair competition law is set up to protect the good will of a business. In the normal course of trade, competition is a healthy as it helps the introduction of quality products in the market in sufficient quantity. Nevertheless, some times there might be unhealthy competition in business activity and in such a situation. Definition of unfair competition : when traders mislead customers or create confusion on the product in the intention to affect the good will or the product of others is deemed to be unfair competition. The law has different remedies either to prevent or cure unfair competition and conflicting of interest between traders, between a trader and his employee and between a trader and other commercial agents. The following acts shall be considered as unfair competition; - acts likely to mislead customers; - any false statement made in the course of business with a view to discrediting the undertaking, products and commercial activities of a competitor; Please give a close look at the following names of commercial activities in our country and give your suggestion whether or not they create confusion. - Sheno Kebie vs. Sheno Lega (Sheno Kebe after court action by traders from Sheno change    its name to Shade - Duru dry cells vs. Durata dry cells, - Sony vs. Sanyo, - Adidas vs. Adibas, etc… Remedies for acts of unfair competition a. Civil remedies - compensation for damages by the unfair competitor to the victim of such act, By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 61 Business Law, An Introduction - injunction-to stop further unfair competition made by the unfair competitor, - publication-notice made to the public to remove the effect of misleading by the expense of the unfair competitor, b. Criminal sanction According to the 1957 of penal code Art. 673 and the current Criminal code of 2004 Art. 719, whoever intentionally commits against another an abuse of economic competition by means of direct or any other process contrary to the rules of good faith in business is punishable, upon complaint, with a fine of not less than 1000 birr or simple imprisonment for not less than 3 months. c. Administrative remedies The trade practice Proclamation No. 329/2003 sets a trade practice investigation commission entrusted with the duty to prevent and to eliminate anti-competitive and unfair trade practices and avoid any restraint on the efficient supply and distribution of goods and services. The commission may impose the following administrative measures: - suspend, correct or eliminate the practice in question, - suspend or cancel business license, - take appropriate measure that enables the victim’s competitive position to be reinstated, - Impose penalty; i.e. fine 10% of the value of the assets of the violator or 15% of the yearly total gross sales of the violator. Fine may also be imposed from 5000 to 50,000 birr. The proclamation defines unfair commercial competition as any act or practice in the course of commercial activities that aims at eliminating competitors through different methods. Article 10(1) of procl. # 329/2003. Pursuant to the proclamation, the following acts are, in particular, shall be deemed to be acts of unfair competition, - any act that causes or is likely to cause, confusion with respect to another enterprise or its activities, in particular, the products/services offered by such enterprise, - any act that damages, or is likely to damage the good will or reputation of another enterprise falsely, - any act that misleads or is likely to mislead the public with respect to an enterprise or its activities, in particular, the products/services offered by such enterprise, By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 62 Business Law, An Introduction 3. Equity accounts: these accounts represent residual equity of a business after deducting all liability. 4. Revenue or income accounts: such accounts represent the company’s or business’s gross earning like sales, service and interest income. 5. Expense accounts: represent the business’s expenditure to enable itself to operate such as electricity, water, rentals, insurance and so on. 6. Contra accounts: these types of accounts represent deductions to a relatively permanent asset such as buildings. The identification of entries in the retail, whole sale, service and manufacturing sectors relies on administrative data received from the actual sale departments. The confidentiality and authorized use of this information is strictly regulated by law. The data received includes source of income including name and address of a client, industry classification, quarterly and annual payroll, number of employees, etc. These data are the basis for construction and maintenance of the business’s financial viability, profit or loss margin, income statement and others. In general, the entry contains all known monetary information relating to the business. Traders and trading (commercial) activities The term trader may be defined in various ways in different fields of discipline. The Ethiopian commercial code, however, defined it as a person who professionally and for gain carries on any of the commercial activities listed under art. 5 of the same code. For a person (either natural or legal) to be assumed as a trader, these three cumulative defining elements must be fulfilled. - The person has to operate an activity professionally, which means the activity must not be a one time activity, rather it has to be an activity in which the person involves regularly. If for example, “A” wants to sell his house for he wants to purchase a new one doesn’t make him a trader as he is not professionally involved in selling houses, instead the sale of the house is just a one time activity. But, if “A” is involved in the business of selling and buying houses, the scenario will be changed since he is engaged in such a business as a full time activity and there fore, he is a trader. - The person has to operate the activity for gain. It is crystal clear that the very purpose of any commercial activity is to acquire some king of gain, which is a positive material enrichment. By this, you may understand that moral gains can’t be By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 65 Business Law, An Introduction considered as gains per se since moral (spiritual/mental) and other similar advantages that one may enjoy are out side the purview of commerce. The purpose of operating commercial activity is to enjoy economic benefit. There fore, a person to be regarded as a trader should not only be a professional but also has to operate the activity with the intention of having some kind of economic advantage. The person while working for a profit may actually suffer losses but this will not alter the position already acquired, in other words, it is the initial motive of the person that must be taken in to account not the fruits of the business, if a person starts a business with the desire of having profit and by chance incurred loss, this cant bar him/her from being categorized as a trader. - The activity has to be one of the enumerations of art. 5 of the commercial code. This is the third and equally important element for categorizing a person as a trader is the requirement that the activity must fall under the list of commercial activities pursuant to the said provision of the commercial code. There are some 21 commercial activities listed under art. 5 of the code and any one engaged in one or more such activities provided that the above two requirements are met, will be taken as a trader. These commercial activities are: a. Purchasing of movables and immovable with a view to re-selling them either as they are or after alteration or adaptation; b. Purchasing of movables with a view to letting them for hire; c. Warehousing activities as defined in Art.2806 of the Civil Code; d. Exploitation of mines, including prospecting for and working of mineral oils; e. Exploitation of quarries not by handicraftsmen; f. Exploitation of salt pans; g. Conversion and adaptation of chattels, such as foodstuffs, raw materials or semi-finished products not by handicraftsmen; h. Building, repairing, maintaining, cleaning, painting or dyeing movables not by handicraftsmen; i. Embanking, leveling, trenching or draining carried out for a third party not by handicraftsmen; By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 66 Business Law, An Introduction j. Carriage of goods or persons not by handicraftsmen; k. Printing and engraving and works connected with photography or cinematography not by handicraftsmen; l. Capturing, distributing and supplying water; m. Producing, distributing and supplying electricity, gas, compressed air including heating and cooling; n. Operating places of entertainment or radio or television stations; o. Operating hotels, restaurants, bars, cafes, inns, hair- dressing establishments not operated by handicraftsmen and public baths; p. Publishing in whatever form, and in particular by means of printing, engraving, photography or recording; q. Operating news and information services; r. Operating travel and publicity agencies; s. Operating business as an agent, broker, stock-broker or commercial agent; t. Operating a banking and money changing business; u. Operating an insurance business. What do you think of this listing of commercial activities under art. 5 of the commercial code? Are these the only activities that must be taken as commercial activities? What about investment in the educational sector (establishment of private educational institutions) and consultancy services. I.e. do you think the list is exhaustive or is it illustrative that others can be added? Discuss! Obligations of traders The very purpose of defining the term “Trader” is to distinguish traders from other people that may engage in profit making activities as the law imposes certain legal obligations on traders. The primary obligations of any trader (either as a single one or in a form of business organization) are the following: 1. the obligation to keep books and accounts, 2. the obligation to get registered, and 3. And the obligation to have business license. The obligation to keep books and accounts By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 67 Business Law, An Introduction Commercial Register managed by the Ministry of trade is almost equivalent to the commercial registers maintained by the regions while central commercial register is a register in which a trader or business organization will be registered for the second time by the document sent to the Ministry for second registration. Here a logical question may be raised that what would happen if a business organization or a trader operates business in different regions? In such a situation, the trader or business organization operating business in more than one region will be principally registered in the first region or in the region in which the head office is situated. In the second and other regions, it will be registered summarily by referring to the first register. Failure to register in the commercial register entails fine or imprisonment. If a trader or a business organization attempt to operate business without being registered in the concerned government organ may be forced to pay a fine of birr 30 to 60,000 and with rigorous imprisonment from 3 to 5 years. (Art. 60(3) of the new (Amended) commercial registration and business licensing proclamation # 686/2010. The over all purpose of registration of traders and business organizations is for statistical data and taxation. The obligation to have business license Every trader and commercial business organization (except joint venture) before commencing the commercial activity should acquire business license. Of course, this is the logical consequence of registration that after being registered, the next step is getting a license i.e. a kind of permission to run the business is going to be issued. Traders and business organizations can exercise their constitutional rights to trade within the frame work and direction of law enacted to safeguard public interest. The process of acquiring a business license was regulated by the former (repealed) laws; i.e. procl. # 67/1997 and council of ministers reg. # 13/1997. And now, is regulated by the new (Amended) commercial registration and business licensing proclamation # 686/2010 art. 30 and the following. Sale and mortgage of Business Sale of a business By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 70 Business Law, An Introduction If the owner of a business wants to sell the business, the contract of sale must be made in writing and the buyer must express his/her full consent to buy it by paying the agreed purchase price. Unless the contract of sale of a business is made in writing, the contract will not be valid and as it is a contract, both the seller and the buyer assume some obligations toward one another. The rights of the seller are the obligations of the buyer and the opposite is also true. Let us now look at the respective obligations of both parties as follows. Obligations of the seller A. handing over the business with its constituent parts, unless there is an agreement to the contrary, B. enabling the buyer to take over the goodwill by handling to him/her all the necessary documents and information, C. keeping book of account for two years available to the buyer from the time when the business has been transferred to the buyer, D. handing over commercial correspondence relating to the business to the buyer, E. Refraining from doing any act of competition likely to injure the buyer for five consecutive years from the sale of the business to the buyer. In particular, the seller may not carry on in the vicinity of the business he sold, a trade similar to the trade carried on by the buyer. To exemplify this, “A” sold her bakery shop to “B” and later on, “A” opened a new bakery shop just adjacent to the bakery shop she sold to “B”, in such a situation, the court may order “A” to close down the shop that she opened since it is against the rules of fair competition and the laws of sale of a business. (Look at Article 158(1) of the Ethiopian Commercial Code of 1960) Obligation of the buyer A. the obligation to pay the agreed price, B. ensuring the fact that a notice of sale is published so that the creditor/s of the seller may be aware of the fact that the business is sold, C. furnishing a legal mortgage as a security to the seller until payment is fully made, D. Refraining from disposing of proceeds of sale/paying the full price to the seller until the period of time for making applications to set aside expires or any such application has been made, until the rights of the creditors have been settled by agreement or by the court and such creditors have been paid. To put it simply, “A” By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 71 Business Law, An Introduction sold her business to “B”. Nevertheless, the business is held by “C” as a security of debt owed by “A” to “C”. There fore, “B” must not pay the agreed price to “A” until “C” s claim is settled either by agreement or by the decision of the court. This is because of the fact that if “A” has nothing to pay to “C”, in stead of “A”, “C” will be entitled to receive the payment that will be made by “B”. (Look at Article 162(1) of the Ethiopian Commercial Code of 1960) Mortgage of a business Mortgage is a contract where by a debtor or a third party furnishes an immovable as a security for the performance of the obligation of the debtor and if the debtor fails to discharge his contractual obligation, the immovable property held as a security will be sold by a court order to settle the debt. Exceptionally, some movables like business can be mortgage. The source of mortgage of business flows from the law or a contract and whether the mortgage emanates from law or a contract, it must be registered in the concerned government organ. (Look at Articles 171 and 172 of the Ethiopian Commercial Code of 1960) Legal and contractual mortgage of business Legal mortgage of business The seller of a business, until the full price is paid by the buyer, has a mortgage right over the business sold in the same way as the seller of an immovable has a legal mortgage on the sold immovable until the total purchase price is paid to him/her by the buyer. The other situation for legal mortgage arises from a creditor who has a claim on a bankrupt trader. The creditor has a priority right against the other unsecured creditors over the assets of the bankrupt trader. Contractual mortgage of business Any person, whether legal or natural, capable under the law and owns a business may enter in to contract with another to mortgage its business. The following essential points are with regard to contractual mortgages and must be kept in mind. - business mortgage shall be made in writing and registered in the concerned government authority during the month within which the mortgage deed is drawn up, - The mortgagee (creditor) has the right to be paid in priority from the proceed of the sale of the mortgaged property. As between the secured creditors, the rights shall By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 72 Business Law, An Introduction for which the business organization is achieved or cant be achieved, or if the partners agree to dissolve it prior to the expiry of the term, or if the term expires unless, of course they agree to continue, or by a court decision. The court will decide on the dissolution of the business organization for a good cause, and there is a good cause if, - There is a serious disagreement between the partners, or - One or all of the partners failed to discharge his/her or Their duties, or - One or all of the partners become incapable. A business organization can also be dissolved due to bankruptcy that if the business entity went bankrupt, i.e. if its losses and debts exceeds its profit and assets, it will come to an end by way of dissolution. we will devote much of our time on the discussion by taking the four types of business organizations, i.e. general partnership, limited partnership, share company and private limited company. - General partnership This partnership consists of partners who are personally, jointly, severally and fully liable as between themselves and to the partnership for the firms undertaking. when a partnership is created, the parties often draw up a memorandum of association which covers such matters as the business purpose of the firm, the contribution of each partner, the value of each contribution, the services required from persons who contribute their skill, the share of each partner in the profits and in the losses and the period of time for which the partnership has been established. A partner in a commercial partnership is considered as a trader. The general partnership needs to have a firm name consisting of the names of at least two of its partners and followed by the words “General Partnership”. For instance, if the names of the partners in a certain general partnership is Mr. A, Mr. B, Mr. C and Mr. D; based on their agreement, the firm name of the partnership will be “A&B General Partnership” or “C&D General Partnership” or “A&D General Partnership” or “B&C General Partnership”. A partner in a general partnership can’t assign or transfer his/her share to an outsider with out the full or majority vote of the other partners. Partners in a general partnership have no limited liability. They have instead, as have been discussed above, unlimited liability that they will be jointly and severally liable to third party creditors, this means if the partnership incurs some liability or debt and if this debt cant be recovered only by the asset of the By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 75 Business Law, An Introduction partnership enterprise, third party creditors will have the right even on the personal belongings of the partners. Again, creditors can sue the partnership in its name, but then can enforce the full judgment against any one of the partners, i.e. if the partnership owes 100,000 birr to Abebe, Abebe can sue the partnership in its name and once judgment is given in his favor, he can enforce the full amount against any one of the partners or from all the partners. The partnership may be administered by one or more managers who may or may not be partners. If no manager has been appointed, each partner is considered as a manager. In cases where all the partners are managers, they may carry out only acts of management. Acts of management refers to the acts or duties of preservation or maintenance of property, leases for terms not exceeding three years, the collection of debts, the investment of income and the discharge of debts. The managers can act on behalf of the partnership and bind the firm. When the manager acts in the firm’s name for his/her own profit, the partnership shall be liable for third parties in good faith. Thus the partnership will not be bound only when the third party knows that the manager was acting for his/her own benefit. In this case, the manager will be personally liable. A manager appointed by the memorandum of association may be dismissed by a court for good cause. How ever, if the manager is not appointed in the memorandum of association, he/she may be dismissed by the partners with out the need of going to court. - Limited partnership Limited partnership differs from general partnership in that it comprises two types of partners, i.e. general partners who are jointly, severally and fully liable; and limited partners who are only liable to the extent of their contribution, this means unlike general partnership, in limited partnership, some members can have limited liability. As a result, the limited partners are not liable for the debts of the partnership beyond the funds they contributed. The limited partnership needs to have a firm name consisting of the names of the general partners and followed by the words “Limited Partnership”. The limited and the general partners draw up a memorandum of association covering such matters as the business purpose of the firm or the enterprise, the contribution of each partner, the value of each contribution, the services required from persons who contribute their skill, the share of each partner in the profits and in the losses and the period of time for which the partnership has been established and the managers and agents of the firm. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 76 Business Law, An Introduction In limited partnership, only the general partners can be appointed as managers. A limited partner takes no part in the management activity. If a limited partner by chance happens to be a manager, he/she will be considered as a general partner and become jointly and severally liable to the debt of the partnership. The limited partners can only consult with other partners, deal with the firm, investigate managerial acts, give advice and counsel to the firm. - Share Company 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. (Art. 304 of the Ethiopian commercial code), so, what we can understand from the above legal definition of a share company is that the liability of the share holders is limited. One holds a share issued by the company in return for payment and is called share holder. In other legal systems, the term share company is not known rather they are known by the term corporation and the legal materials which refer to these companies are entitled as “Law of Corporations”. you should not confused the term corporations also with some public enterprises in Ethiopia like the telecommunication corporation as this corporations are owned by the government as public enterprises and their governing law is called charter, i.e. they are chartered corporations. Those who form the company are called founders. They must not be less than five in number, they initiate the plans and facilitate the formation of the company, and they prepare various documents including the constitutional documents of the company, i.e. article and memorandum of association and submit them to the relevant government authorities for the purpose of registration. The memorandum of association consist the name of the company, the objective or the purpose for which the company is formed, the par value of the shares, the amount of the capital subscribed and paid up, the period of time for which the company is to be established, etc…the article of association, on the other hand, regulates the internal management, the rights and duties of share holders vis-à-vis the company, etc… A share company needs to have a company name which should not contradict with public policy and the right of others and what ever the name of the company; it should always include the term “Share Company”. In share companies, the money is raised by issuing shares in the company. A share is a part of the total ownership interest of the company. A share holder must pay the company for each share allotted to him/her. The memorandum of association must state the By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 77 Business Law, An Introduction we have been discussing the basic features of commercial or business associations, therefore, there is no need of making further listing of these features of such associations, rather let us see the respective merits (advantages) and demerits (disadvantages) of conducting commercial transactions by making use of business organizations or associations. Advantages of business organizations or associations i. strong and reliable fund source, ii. limited liability, iii. free transferability of shares, at least in principle, iv. possibility of the enhancement and development of the business, v. capable and efficient management system, vi. Stability and relatively sustenance nature of the business. Disadvantages of business organizations or associations a. lack of initiation, b. delay of decision, c. conflict of interest and disagreement between the partners or shareholders, d. administrative expenses, e. Control by elites, i.e. by small group of individuals of the business. By the way, in our country, financial institutions like banking and insurance businesses can only be conducted by a form of Share Company, in other words, we cant engaged in such financial business in the form of PLC, or general or limited partnership. What do you thin is the reason? Discuss! So from the above points, which type of business structure do you think is the most effective in undertaking a business? Discuss it with your fellow friends! Review questions 1. What is a business? 2. List down and explain the constituent elements/components of a business. 3. Some people say that competition is encouraged in order to provide quality product and service in the market while others say that competition is not a healthy act of a trader. Discuss. 4. How do you distinguish between a business, trade and commerce? By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 80 Business Law, An Introduction 5. What is a business organization? 6. What is a partnership agreement? 7. What is the difference between a general and limited partnership? 8. Three individuals approached you who want to establish a business organization but are not sure as to what kind of business organization they should establish. They have some 30,000 birr to be allocated as an initial capital. Two of them have other businesses and thus can’t act as managers of the organization. What kind of business organization do you think would best suit the purpose of the three individuals in view of the facts given above and why? 9. W/ro Fatuma is a lawyer. She owns a large law library, several word processors, a lease on a good office and furniture. She employs three other lawyers and a non-legal staff of five people. Does W/ro Almaz operate a business? Why or why not? 10. What is the difference and similarity between a PLC and S.C? Chapter 5 Law of Insurance 5.1. Definition of insurance Regarding the definition of insurance, we two different types of approach of definitions. The term insurance can be defined from the perspective of its function and from the perspective of its being a mere contract. Let us see these two approaches of definitions.  Functional approach of definition: functionally, insurance may be defined as a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk.  Contractual approach of definition: according to this approach insurance is a contract where by one party, the insurer agrees to pay a specified sum of money on the happening of a particular event to another party called the insured or a third party beneficiary designated by the original insured person, who in turn agrees to pay a sum in the form of a premium for its consideration. Especially, when we consider the second category of definition, we find the following elements; o Insurance is a contract, therefore, it has to meet all the essential requirements of any valid contract; i.e. both the insurer and the insured should have the free consent and capacity and By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 81 Business Law, An Introduction the subject matter of the insurance contract should be sufficiently defined, it should be possible to perform, it should be legal and moral, and it should be made in a special form. o The duality of parties. We have two parties in insurance contract; these are the insurer and the insured. the insurer is the party who assumes the obligation to pay a certain amount of money as a compensation for another person upon the happening or materialization of an event, where as, the insured is the party who seeks the protection against the risk and who assumes the obligation to pay the agreed amount of money as a form of premium to the insurer. The insured person may also assign another person to benefit from the payment. This person is known as a third party beneficiary. o The purpose of the insurance contract is nothing but to cover risk of loss of a specified type which may be loss of property, life or bodily harm. It is to indemnify the insured if he/she suffers a loss. A brief historical note of the concept of insurance Marine insurance is the oldest form of insurance followed by life and fire insurance. The history of insurance can be traced back to the early civilization. As civilization progressed, the incidence of losses started increasing giving rise to the concept of loss sharing. The Aryans through their village cooperatives practiced loss of profits insurance. The Mediterranean merchants also practiced it in the 14th C. through the issue of Bottomry bonds. The code of Manu indicates that there was the practice of marine insurance carried out by the traders in India with those of Sri- Lanka, Egypt, and Greece. The earliest transaction of insurance as practiced today can be traced back to the 14 C. A.D. in Italy when ships were only being covered. This practice of marine insurance gradually spread to London and during the 16th C. it was established in the mercantile transaction. The history of marine insurance was closely linked with the origin and rise of the Lloyds ship owners. The Lloyd’s act was framed to set-up the Lloyds by whom they were empowered to transact other classes of insurance. Today Lloyd’s is regarded as the largest insurance underwriter in the world. (Extracted from the book Bodla, B.S (Dr.) et al , INSURACE fundamental, environment and procedure , Deep & Deep pub. New Delhi, 2003, pp. 9 ) 5.2. Obligations of parties in contract of insurance By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 82 Business Law, An Introduction discussed above, a legal obligation to disclose all the material facts/information or any new thing relating to the subject matter insured to the insurer to enable the latter to take a proper course of action and failure to do so entails a legal liability on the insured who concealed the fact. Elements of an insurance policy An insurance policy is the document on which the respective rights and obligations of the parties are clearly stipulated and every insurance policy should contain the following elements;  the place and date of the contract,  the names and addresses of the parties,  the item (property), liability or person insured,  the nature of the risk insured,  the amount of the guarantee,  the amount of the premium, and  The term for which the contract is made. But have you noticed that the signature of both parties is not required to be included in the policy, and due to this, there are some business lawyers who argue that an insurance policy is different from that of the actual contract of the insurance. Do you hold the same view? Discuss! Classification of insurance There are various types of insurance, among which, the following are the major ones. 1. Marine insurance: - is the oldest form of insurance which covers the risk or perils involved in the transaction of goods and passengers by sea. a ship transporting goods or passengers may be damaged or destroyed or the whole or part of the cargo can be lost, and consequently, there can be loss of freight; and marine insurance there fore, cover such kind of risks. 2. Property Insurance is the other type of insurance which covers loss of movable and immovable properties caused by fire, flood and other natural calamites. It is always possible that a fire may spread and destroy big factories, ware houses and shops and all these losses can be covered by fire insurance. For example, newly built skyscrapers winds are glasses so glass insurance is a must. 3. Life and accident insurance: - a life insurance is a combination of saving and security element. It provides for a payment of a specified amount of money to persons whose names By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 85 Business Law, An Introduction are stated in the policy or to the insured’s heirs if death occurs within the time limit specified in the policy. If the insured is alive and the policy matures for payment, the savings will be helpful in his/her old age. The other life insurance type is accident insurance, which covers risks of bodily harm resulting in injuries. 4. Liability insurance: - is the other type of insurance which covers the risk of liability towards third parties which the insured is required to pay such as damages on property belonging to third persons, non-performance of contractual obligations, injuries or death of third parties due to the fault of the insured person, etc. Currently Third party Motor Insurance is mandatory in Ethiopia. This insurance coverage scheme is for some one vehicle cause personal injury or death on another person and/or damaging other person’s property. In the Ethiopian commercial code, the recognized types of insurances are; - Property insurance - Liability insurance - Life insurance, and - Accident and illness insurance. Distinguishing characteristics of Life insurance from property insurance.  Amount insured freely fixed  Substitution by insurer is prohibited  The event is bound to happen but the actual time of its occurrence is uncertain.  It is not the an insurance of indemnity  The insurable interest only exists at the time of contract of insurance  Life insurance contract is along term contract  There is no problem on making of over and under insurance Fundamental principles of insurance contract Insurance contract, though it is a contract and shares some common elements and features with other types of contracts, it has its own unique principles which differentiate it from other contracts. Let us now consider these principles as follows; 1. The first one is the principle of utmost good faith. it is an inherent duty of both parties in the contract to make full and fair disclosure of all material facts relating to the subject matter of the proposed insurance. Both parties should not conceal any fact from each other. The insured By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 86 Business Law, An Introduction party should disclose all the necessary information (material facts) truly and fully and the insurer should also inform genuinely the exact and correct amount of the premium that the insured is going to pay. 2. The second one is the principle of indemnity. Except life and body injury insurance which may not be always indemnified, the insurer assumes the duty to indemnify the insured party for a loss or damage resulting from specified perils. The main purpose of indemnity is to place (reinstate) the insured after a loss in the same position as she/he occupied immediately before the event. 3. The third one is the principle of insurable interest. This means the insured must posses some proprietary or pecuniary interest in the subject matter of the insurance contract. If there is a pecuniary benefit or loss from the existence or destruction of the subject matter, there is an insurable interest. 4. The fourth one is the principle of Causa Proxima (Latin) or proximate cause. The insurer is liable to pay the agreed insurance benefit if the risk or peril occurs with out interruption. The accident must have a cause-effect relationship that the cause of the event has a close relationship with the effect (result). 5. The fifth one is the principle of commencement of the risk. The risk commences or begins after the contract of insurance is entered in to and the risk must be attached with the risk, if the property insured is safe (still exist) the risk wont attach and the premium may be recovered. 6. The other one is the principle of mitigation of loss. The policy holder (the insured) is duty bound to take all the necessary steps for at least reducing the loss as much as possible. 7. The seventh one is the principle or doctrine of subrogation. After the insured being indemnified in full by the insurer, the insurer will put it self in the shoe of the insured (the insurer will take the right and the position of the insured) and will become entitled to the remnant of the property insured and all the rights and claims which the policy holder may have against third parties. 8. The last one is the principle or doctrine of contribution. In cases of double insurance, all insurers must share the burden of payment in proportion to the amount assured by each. The concept of Double Insurance and Re-Insurance By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 87 Business Law, An Introduction o bill of loading o air way bill o Railway bill and others. The obligation of the debtor (the drawer) in negotiable instruments The obligation of the debtor (the drawer) is to pay the amount of money specified in the document to the holder of the document. The drawer is required to pay the amount of money stated in the document, be it a cheque or a bill of exchange or a promissory note when, i. The instrument/document is presented to him/her as presentment of the instrument is a very essential requirement, and the holder may not exercise his/her right without presenting the instrument. ii. When the possessor/holder satisfies him/her (the drawer) that he/she is a true owner of the instrument. iii. The document is presented to the debtor (the drawer) at maturity, i.e. the debtor (the drawer) is only required to discharge his/her side of the obligation on the day at which the obligation is due. Defenses available to the debtor (the drawer) When a debtor (drawer) is required to debts incorporated in the negotiable instrument, there are some defenses that he/she (the drawer) may raise against the holder of the instrument. Art. 717 of the commercial code mentions all the available defenses which the debtor (the drawer) may raise, these are; 1. Defenses based on personal relations between him/herself and the payee, i.e. the creditor. For instance Mr. X and Mr. Y may conclude a contract of sales and Mr. X; the buyer gave a cheque to the seller Mr. Y for the payment of the commodity that he has bought from Mr. Y. unfortunately, the seller Mr. Y couldn’t discharge his side of the obligation that he failed to deliver the commodity he had sold to Mr. X and he went to the bank and require payment, but the bank dishonored the cheque, i.e. refused payment as it has been ordered by the drawer not to effect payment. then, Mr. y, the payee of the cheque, recourses to the drawer and used him in a court of law, at this time, the drawer may raise his personal By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 90 Business Law, An Introduction (contractual)relation with Mr. Y as a defense that he stopped payment as Mr. Y failed to perform his obligation and he may be successful in the suit. 2. Defenses of form and those based on the text of the instrument that if the instrument is altered/cancelled or if one or more requirements of the validity of the document are missing, the drawer (the debtor) will have the right to raise this as a defense. 3. Defense based on the falsification of the signature of the drawer. If the signature of the drawer (the debtor) is proved to have been falsified or forged, he/she (the drawer) has the right to raise defense based on such ground and refuse payment. 4. Defense based on lack of representation (authority). When a person sings on a negotiable instrument on behalf of another person without having been authorized to do so, the person on whose behalf the instrument/document is signed can’t be held liable and he/she may raise it as defense when required to effect payment. 5. Defense based on lack of capacity. Any person who is incapable (who lacks capacity) can’t perform or entered in to any kind of juridical act.45 Since singing and issuing is one of the juridical acts which have a legal effect, the drawer may raise this as defense by saying that “I was not legally capable at the time of singing and issuing of this document so I should not be compelled to effect payment”. 6. The last defense available to the debtor not to pay the amount of money stated in the negotiable instrument is defense based on the absence or non-fulfillment of the necessary conditions for bringing legal proceeding. when a holder of an instrument is being refused payment, before instituting a law suit on the drawer,  first, he/she (the holder or the payee) must present the instrument at maturity,  secondly, he/she must get a letter of protest from the refusing party,46  Thirdly, he/she has to give a notice to the drawer that he/she has been refused payment by the drawee/payer. the holder of the instrument must follow these procedures before taking the case to the court, and the drawer may raise these as a defense by saying “the holder haven’t bring the instrument at 45. Remember our discussion concerning capacity under the first and second chapter of this hand out. 46 . In cheque transaction, if banks refused to effect payment for various reasons, they usually give a letter of protest which confirms their refusal to the payee as per art. 717(2) and art. 869(1) and (2) and art. 871(1) and (2) of the Ethiopian commercial code. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 91 Business Law, An Introduction maturity” or “the holder haven’t received letter of protest from the refusing party” or “the holder didn’t give me a notice”. Holder in-due-course (Good faith acquirer) In negotiable instrument transaction, if the a person acquires the instrument/document in good faith, he/she will be the true owner of the instrument even though he/she took it from a thief or a finder and the debtor/the drawer may not have the right to raise the defenses, which are available to him/her (to the drawer) against the original payee, against such holder-in-due course unless it is proved that the holder knew or should have known the defective title of the original owner/payee of the document. In order to be a holder-in-due course/good faith acquirer, the individual must have acquired the instrument in good faith that he/she knew nothing or shouldn’t have known any thing about the defect or a wrong doing concerning the document. If the holder-in-due course proves him/herself to be a good faith acquirer, as have been said earlier, the debtor can’t raise defenses which he/she can raise it against the original holder/payee. But if the individual/holder of the document acquires the document in bad faith, he/she will be an ordinary assignee that he/she wont have a better title than his/her transferor has, this means that the transferee’s right is highly depends on the right of the transferor. Negotiation or form of transfer of a negotiable instrument The law has devised rules governing negotiation or form of transfer of a negotiable instrument in order to avoid unnecessary conflict. These forms are -to bearer instrument -to a specified name instrument or to order. - To bearer instrument : since there is no clearly specified name in the document, any one who bears or holds the paper or the document is fully entitled to the right that document gives. Assume that the following is a bearer cheque which is one of negotiable instruments. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 92 Business Law, An Introduction This is a restrictive endorsement. 1. If the endorser is not going to guarantee payment to other receivers or subsequent endorsees, then the endorsement method is said to be a qualified endorsement. But if the endorser guarantees payment to other subsequent endorsees, it is unqualified endorsement. Effects of endorsement An endorsement transfers all the rights arising out of the instrument, provided that the legal requirements are fulfilled, and it entitles the endorsee to all the rights contained in the instrument. The endorsee, on the other hand, can enforce the right him/herself by claiming the money or else, he/she may re-endorse it to another person unless the endorsement is not restricted by situations which we have seen above. When we consider the effect of in-blank endorsement, the endorsee;  may simply transfer it to another person without filling up the blank and with out re- endorsing it just like a bearer instrument, OR may fill up the blank with his/her own name or the name of another person, OR May also re-endorse the instrument in blank by only putting his/her signature to another person. Commercial instruments It is a piece of paper which entitles a person to a specified sum of money and which is transferable from person to another person by mere delivery and by endorsement and delivery. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 95 Pay to:-Mr. X, (the endorsee) “only for Collection” or “value in Collection” Mr. Y (the endorser) Signature Business Law, An Introduction  They embody a right to an entitlement  The right contained in commercial instrument is a sum of money whose amount is clearly fixed  they are transferable Bill of exchange Definition: - these are instruments by means of which payment may be effected with out the use of cash, or payment postponed by the granting of credit; Bill of exchange are used for both domestic transactions and in international trade. There are three parties in the bill of exchange transaction. These are;  the drawer (the issuer) the person who issues the bill of exchange  the payee, the person to whose favor the bill is issued  the payer (the drawee), on whom the order to pay is made Form of bill of exchange: - a bill of exchange shall contain - the term “Bill of exchange” inserted in the body of the document and expressed in the language employed in drawing up the instrument, - an unconditional order to pay a sum contain in money, - the name of the person who is to pay the bill (the drawee/payer) - the time and place of payment (how ever, if the time of payment is not clearly stated in the document, the bill will still remain valid and become a time bill 47) - the place of payment (again, if the place of payment is not clearly stated in the document, the bill will still remain valid and become a sight bill 48) - The name of the payee or an indication that it shall be payable to bearer, - the date and place of the issuance of the bill, - The name and signature of the drawer, i.e. the person who draws up/issues the bill and gave it to the payee. 47. A time bill is a kind of bill which should be payable at any time when the payee demand payment. 48 . A sight bill is a kind of bill which should be payable at sight or a fixed time after sight, i.e. at the place where presentment of the instrument is made. By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) 96 Business Law, An Introduction Model bill of exchange Cheque A cheque is an unconditional order in writing drawn on a bank singed by the drawer, requiring the banker to pay on demand a sum certain in money to bearer, to a specified name or to order. - drawer is the person who singed the cheque and authorized the bank to pay the money, - drawee (the banker) is the entity which is authorized to pay the money to the payee, - The payee is the party who is to be paid by the order of the drawer. Form of a cheque A cheque shall contain o an unconditional order to pay a sum certain in money o the name of the drawee/the bank which is to pay o the place of payment o the place and time of the issuance of the cheque o the name of the person who is to be paid (the payee) or an indication that payment is to bearer o The name and signature of the drawer. Payment of cheque By: - Aron Degol H. (LLB, LLM, MBA) Eyob Amedie A. (LLB, MA) Bill of exchange Birr 3,000 Date: - July 3, 2006 Addis Ababa Pay to Mr. X (the payee) or to his order on July10, 2006/upon presentment at his office or at sight, the sum of birr 3000.00 with interest at the rate of ___percent____ from date, until paid. To Mr. Y (the drawee/payer) Miss. Z (the drawer) Signature 97