Contract Law


As it is remembered, different ways by which contractual obligations can be extinguished have been seen. The last way by which contractual obligation comes to an end is limitation of action. Limitation of action will be discussed, along with prescription and limitation of right.


Under this topic we will discuss the effect of the period of limitation on principal and collateral obligations, the instances on which the period of limitation is interrupted, the role of court in disregarding and considering, along with the right of the parties in waiving and invoking the period of limitation.


Under the Ethiopian law of contract limitation of action has been put as one way of extinction of obligation. Making period of limitation a means of extinction of obligation creates security of business transaction eroding uncertainty among contractants. Period of limitation also avoids bafflement which might be created owing to loss of evidence when time lapses. Its deterrence impact on dormant contractants is also considerable purpose of extinction of obligation by period of limitation after which the party will not be compelled by thes undertaking in the contract. The problem related with loss of evidence after the lapse of a considerable of period time is also avoided by period of limitation or prescription. Prescription can be either acquisitive or liberative. Acquisitive prescription entitles the beneficiary with certain right after the expiry of certain period of time.


Period of limitation is one classification of prescription that includes libertive and acquisitive prescription. Liberitive prescription relieves the beneficiary from certain obligations after the lapse of certain period of time.


In liberative prescription there can be limitation of right and limitation of action. Limitation of right absolutely extinguishes the right of the other party while limitation of action extinguishes the right to bring action i.e. court action. The Ethiopian law of contract under Article 1845 provides the principle of period of limitation.


Art.1845__ Period of limitation

Unless provided by law, action for performance of a contract, action based on non-performance of a contract and action for invalidation of a contract shall be barred if not brought within ten years.


According to this provision “action for performance” refers to bringing a court action to effect performance, “action based on non-performance of a contract” refers to bringing court action aimed at remedies of non-performance like damage, cancellation and even forced performance, and “action for invalidation of a contract” refers to bringing court suit to have a contract invalidated. All these actions shall be barred unless brought forward within ten years.


Discussing whether period of limitation bars right or action is on issue worth discussing. In dealing with this, the title of the section where the provision is found connotes that it limits action. In addition to that the French version equivalent to this provision (Article 2262) limits all actions. There are also provisions that show the possibility of existence of certain rights even after the lapse of the prescribed time. Article 1850, showing that limitation does not bar the right exercised on pledge even when period of limitation bars the principal obligation, exemplifies such provision.


On the other hand, it is argued whether this provision limits all rights out of the contract albeit the indication of its title. Professor Rene David has put this position in his commentary as: “The Ethiopian code preferred the formula found in the Italian civil code which provides that all the rights are subject to ten years limitation.” He has confirmed this position denoting that the right created by the contract disappears by limitation; it can be asserted in anyway.


The controversial issue in light of period of limitation is the relationship between Article 1845 and Article 1810.


The time when period of limitation starts to count has been put under Article 1846 of the Civil Code as:


Art.1846__ Beginning of period of limitation

The period of limitation shall run from the day when the obligation is due or the right under the contract could be exercised.


Period of limitation for action based on non-performance does not for example beginto run from the time of the formation of the contract unless performance shall be made immediately. If the time of performance of the contract is after one year from the formation of the contract, period of limitation runs one year from the formation of the contract as the obligation is due after one year.


The provision additionally solves the problem with respect to certain obligations like conditional rights, which are treated separately as made in Article 2257 of the French Civil Code. The French Civil Code deals with each right which can be due or claimed at another time from the time of formation of contract. Conditional right cannot be exercised till the condition is fulfilled and it is then when period of limitation runs.


Ambiguity that could arise in respect of annuities has been covered by Article 1847 where limitation runs from the day the first payment was not made was due. Article 1847 has clarified the perplexity verbally as:


Art.1847- Annuities.

In respect of annuities, the period of limitation shall run from the day when the first payment not made was due.


In annuities the due date of the payments is different. One payment is paid first and the following will be paid next. The Civil Code makes the time of the first payment a reference for counting period of limitation in respect of annuities.


Someonewho is entitled to be paid every May 1 and November1 is not, for example, paid as of 1960 till 1975. It is questionable if his right is barred for his claims staring November 1, 1960 – November 1964 as these payments have been due for more than ten years or he has lost all his right since ten years has lapsed before the rights are asserted. According to Article1847, all the rights are barred starting from the time when the first payment which was not made is due.


Haziness, which can be created by way of assessing a year whether in weeks, days or hours, has been dealt with under Article 1848. Accordingly, the period of limitation shall run from the day when the obligation is due or the right under the contract could be exercised and is effective, excluding the day on which period of limitation begins to run. The action is barred upon the expiry of the last day without having been used.


If the remaining last day for the effect of period of limitation is a holiday, the action shall be debarred on the next working day. According to the exemplification of David “If a claim is due on March 3, 1955, the period of limitation will be completed on March 4 1965 at the very beginning of the day” (6:00Am considering Ethiopian way of dividing days into hours).


Principally period of limitation is one way by which obligation extinguishes. Extinction of principal obligation might have different effect on the collateral obligations attached to it. The effect of period of limitation on collateral obligations has, accordingly, been treated under Article 1849 and 1850.



Art.1849__Collateral claims.

Interests and collateral claims shall be barred where the principal claim is barred.


According to this provision, as a rule interests and collateral claims are barred when the principal obligation is debarred by period of limitation. This seems justified, for the collateral claims depends on the principal claim which is being barred by period of limitation.


When the collateral claim is a pledge, however, the pledgee may exercise his right on the pledged property pursuant to Article 1850 which says: “A creditor whose claim is secured by a pledge may exercise the rights arising out of pledge notwithstanding that the claim is barred”


Assume that Ato Ejigu borrowed 5000 Birr to be paid after one year with 2% interest. After 2 years Belay pledged his car and Wasihun became a guarantor. The obligation to repay the debt is barred after 11 years as the right to reclaim starts after one year and this year is not included. Ten years has not lapsed for the obligation of Belay and Wasihun even after 11years lapses from the due date of the principal obligation.


Be that as it may, Ejigu cannot exercise his right on collateral obligations like surety, and mortgage eventhough 10 years has not lapsed for the claim on surety and mortgage. If the principal obligation is barred collaterals are also barred excepting pledge. He can, accordingly, exercise his right on the pledge.


There are two ways by which period of limitation is interrupted. These are recognition of the debt by the debtor and bringing of action or providing default notice to effect payment. These two ways have been stated in Article 1851 sub (a) and (b).




The period of limitation shall be interrupted where:

(a) the debtor admits the claim, in particular by paying interest or installments or by producing a pledge or guarantees; or

(b) the creditor brings an action for the debtor to discharge his obligations.


When the debtor recognizes the presence of debt by paying interest, installments, providing pledge or mortgage, the period of limitation is interrupted. When the creditor brings an action to effect performance, period of limitation is again interrupted. A court action interrupts period of limitation if it is communicated to the debtor. If the debtor is communicated, it is not necessary that the action be brought to a competent court. Serving notice to the debtor is enough to interrupt period of limitation. It must be born in mind that these ways by which period of limitation is interrupted are illustrations which might again include other ways like novation.


Interruption of period of limitation is of great importance for the creditor, as his right is not debarred. This effect of interruption of period of limitation has been indicated under Article 1852 as follows:


Art.1852.__effect of interruption.

(1) A new period of limitation shall beginto run upon each interruption

(2) Such period shall be ten years where the debt has been admitted in writing or established by a judgment.


According to this provision, a new period of limitation runs when there is interruption. A new ten years period starts to run. Assume for example Ato Abraham did not require performance for 9 years against his debtor. If Ato Abraham did ask performance or put the debtor in default, a new period of limitation starts to run. Then Ato Abraham can require performance again within ten years after 9 years. He can then require performance within 19 years from the formation of the contract.


The court has discretion whether certain claim shall be barred by period of limitation or not when there is special relationship between the parties. Article 1853 empowers the court with the power of setting aside a plea of period of limitation if it is convinced that the creditor failed to exercise his right because of obedience or fear he feet of the debtor with whom he has special relationship.


Art.1853 __ Special relationship between the parties.

(1) The court may set aside a plea based on limitation where it is of opinion that the creditor  failed to exercise his rights in due time on the account of obedience he owed to or fear he felt of the debtor to whom he is bound by family relationship or subordination.

(2) In such a case, third parties who guaranteed the payment of the debt shall however be released.



If for example a employee of Ato Haile fails to exercise his right to require payment of 1000 Birr, which he lent to his employer, and his right is debarred by period of limitation, the court may set aside plea of period of limitation.


If Kebede lent 5000 Birr to his father and 10 years lapsed before he requires repayment, the court may disregard period of limitation if his father invokes period of limitation. The court does not, however, have such discretion with regard to third parties who guarantee payment. Third parties are required to be released of their collateral obligation pursuant to Article 1853(2).


Although the value of good faith has paramount importance in law of contract, bad faith of the parties is rarely considered in enforcing period of limitation. The beneficiary of period of limitation can raise period of limitation contrary to good faith according to Article 1854 of the civil code.


Period of limitation is a mandatory way of extinction of obligation and is not subjected to the agreement of the parties. They can never waive it in advance by agreement, nor can they fix period of limitation other than that fixed by law. Such prohibition has been provided under Article 1855 as:


Art.1855.__ Contrary provisions.

The parties may not in advance waive limitation nor may they fix periods of limitation other than those fixed by law.


It can, however, be waived after it has been due. Beneficiary of period of limitation is at liberty to waive period of limitation after it has fallen due. Failure to raise period of limitation is considered to connote waiving of the defense of period of limitation. In light of this, Article 1856 denotes the above connotation.



Art. 1856__ waiving of limitation.

A party may waive limitation after it has become effective.

The court shall not have regard to the period of limitation unless pleaded.


It is questionable if this is equally applied to Article 1810 which says, “No contract shall be invalidated unless an action to this effect is brought within two years from the ground for invalidation having disappeared.” The phrase “No contract shall be invalidated” seems to impose obligation on the court not to allow invalidation even though plea of limitation is not raised.

Set off


Set-off is among the grounds by which a contract is extinguished. In this section we will discuss set-off as one way of extinction of obligation. The conditions in which set-off is possible and the conditions in which set-off is not legally allowed will be discussed. The role of courts in effecting set-off and the restrictions will also be the concern of this topic.


As you can see obligation extinguishes when set-off is made. Article 1831 of the civil code is provided to indicate the extinguishing effect of set-off as:


Article 1831- principle

Where two persons owe debts to one another, set off shall occur and the obligation of both persons shall be extinguished in accordance with the provisions of the following Article.


As of this provision, two parties in which one is a debtor in respect of one obligation while a creditor with respect of another obligation to other party may extinguish the obligation by set-off.


Assume that Ato Abebe owes Ato Tolosa birr 500,000 in one transaction and Tolosa owes Abebe birr 500,000 in another transaction. The two parties can then set-off their debts and extinguish their obligations. Set-off can be made upon the fulfillment of certain conditions although the contractants owe debt to one another. These conditions have been put as positive and negative conditions respectively under Articles 1832 and 1833. Article 1832 has put the positive conditions as:


Article 1832–positive condition

Set off shall not occur unless both debts are money debts or relate to a certain quantity of fungible things of the same species and both debts are liquidated and due.


The conditions that are provided in Article 1832 are.

(a) The debts shall be money debt or fungible things of the same species.

(b) The debts shall be liquidated.

(c) The debts shall be due.


Set-off is not possible if someone owes in item and the other owes in money. Nor is set-off possible when the debts are items unless the items are fungible things. The money debt or fungible things shall also be liquidated ones in that the parties should be certain about the debt. The parties shall not have a dispute as to the amount of the debt. If the amount claimed by the creditor and the amount accepted by the creditor is not equal, the debt requires further liquidation. In such disagreement the debt is not liquidated and hence not subjected to set-off.


However, although the debt is required to be liquidated so that the court can make set-off when it is required to do so, there is exception to the requirement of “liquidation” of the debt.  According to Article 1841 eventhough one of the debt is not liquidated, the court may decide that set-off has been made to the extent of the admitted amount.


Assume that Ato Mesfin claims to owe Ato Zeberga birr 500,000 while Ato Zeberega admitted to have owed only birr 300, 000 and denied the birr 200,000( is contested). In such a case, although birr 200,000 is contested, the debt to the extent admitted (birr 300,000) can be subject of set-off.


The other exception is when the debt can be liquidated without delay. A debt whose amount is contested by the parties or which is not fully liquidated can be delayed so that set-off is made with regard to the whole debt. The court may suspend judgment against the debtor whose debt is liquidated until the other debt is liquidated if the debt can be liquidated without delay. These are exceptions to the condition that the debt shall be liquidated so that set-off is made.


The other condition is that the debt shall be due at the time set-off is required. The time when both obligations are required to be performed shall be at the same time. If one of the debts is to be paid on September 1 and the other debt is to be paid on October 3, set-off cannot be made with regard to these two debts on September 1 since both debts are not due by then.


This requirement protects the debtor who can be beneficiary of time limit. The one who shall perform the obligation in October 3 is the beneficiary of time limit and refusal of set-off is not to affect such contractant adversely.


An exception to this requirement has been provided under Article 1834 dealing with period of grace. Granting of period of grace does not bar set-off although the time in which payment shall be made is protracted by the court order of period of grace. A debtor who is given period of grace shall not be protected against set-off like other beneficiaries of time limitation.


Although the debts are liquidated and due, there are also other requirements which shall be additionally fulfilled. Additional negative conditions have been provided under Article 1833.

1833 Negative conditions

Set –off shall occur regardless of the cause of either obligation except where

1)      the special nature of the obligation requires that the creditor be actually paid , as in the case of maintenance or        wages necessary for the livelihood  of the creditor and his family; or

2)      the obligation is owing to state or municipality ; or

3)      The obligation is to restore a thing of which the owner has been unjustly deprived ;or

4)      The obligation is to return a thing deposited.


If the special nature of the obligation harmfully affects one of the parties when set off is carried out, set off is prohibited for such kinds of obligation. Someonewho lives on a maintenance payment might be in another transaction with a debtor( the person under obligation to  pay him maintenance ); if his maintenance payment is set off he might be in a position not to live. If he is refused payment of his maintenance payment for he is debtor, his life might be endangered. Protecting such undesired consequence of set-off begs providing of exceptions to set-off.


An obligation owing to state or municipality is not subjected to set-off because the action by which the state or municipality become debtor and creditor can be different. In such a case set off can mess up the accounting system of the state or municipality.


Excluding an obligation to restore a thing unjustly taken from being subject of set-off is to deter unjust deprivation of property and recognize its immoral nature. Excluding such obligation has great social importance in deterring unjust deprivation of properties like theft. Allowing set-off with debt owing to unjust deprivation on the other hand entails negative connotation of encouraging deprivation.


When the obligation is to return a thing deposited, it is not again subject of extinction by set-off. The basic reason for this is actually to give protection and encourage the trust built among parties. It is a confidence that makes a party deposit something with some one. Such special confidence is required to be created and protected for the sake of smooth social relationship. Obligation to return a deposited thing is excluded from being extinguished by set-off to achieve the said purpose.


Be that as it may, set-off cannot be made in the absence of intention to do so. Article 1838 provides that if the debtor fails to inform the creditor his intention to effect set-off, set-off does not occur. Knowing intention can be difficult as there is no proof of mental element of the parties. Circumstances from which the mental element of the parties can be inferred should be considered.  Set-off cannot be made upon the proposition of the court. The court is strictly prohibited from making set-off unless it is raised.


Parties do have freedom of contract about set-off with regarded to obligation they assumed reciprocally. Parties may wave their legally permitted right to require set-off. Article 1839 to this effect has provided that the debtor may in advance waive his right to make set- off. Freedom to wave set off encourages further transaction between parties who have unsettled obligation.



Assume that Ato Tillahun is a debtor of Ato Fitsume in one transaction. Ato Tillahun may not enter into a contract with Ato Fitsume for fear that Ato Fitsume may make set-off to Ato Tillahun’s claim in their future transaction. Although Ato Fitsume may promise not to make set-off for he needs the transaction with Ato Tillahun, Ato Tillahun may not rely on the promise of Ato Fitsume unless the law recognizes and gives effect for such contracts. There can be such binding effect of law if the other party can wave set-off. The rationale behind giving a legal effect for waiving of set-off in advance is to encourage furtherance business transaction and smooth furtherance of economic and social advancement.


Freedom of the parties is not only to wave their right to set off but also to extend set-off beyond the legally possible ones and set aside certain conditions. Article 1840 permits occurrence of set-off eventhough it is not provided by law if the parties agree. Legally it is money debts or tangible things, which are subject of set off. However, parties can specify conditions of set-off, otherwise setting aside the legally provided conditions.

For example Henok and Biniyam may agree to make set-off to their debt, which they owe each other though it is not due. They may also agree to effect set-off though the debts are neither money debts nor fungible things. Since freedom of agreement made under the umbrella of public and social policies are guiding principles of contract, agreement of the parties as to either exclusion or inclusion of set-off has legal effect.


As it is known we are discussing set-off under extinction of obligation. The effect of set-off is then extinction of obligation. Although set-off extinguishes obligation, its extinction effect is limited to the lesser amount regarding debts subject of set-off. Article 1836 has been provided connoting this effect as:

Art.1836__Effect of set-off

The debts shall extinguish each other as from the day when both exist and to the amount of the lesser debt.


In its effect set-off extinguishes obligation to the lesser extent as it is illustrated below. Assume A owes B 500 Birr and B owes A 1000 Birr. Set-off does not extinguish obligation of paying the whole birr of 1000. Here set-off can take place up to Birr 500 only and the rest (500) remains as a debt of B against A.


This might cast doubt if the right to refuse part payment might not be applied in the case of set-off in light with the extinction effect of set-off to the extent of the smaller debt because if set-off is effective to the lesser amount, the one who is entitled to a greater amount might not refuse set-off although part of his claim is to be extinguished. He can, however, refuse part payment.


Assume for example Abebe is a creditor of Hanna to the extent of 1000 Birr. If Hanna provides to pay 500 of the debt as a part payment, Abebe may refuse to receive pursuant to Article 1746 (1). What if Hanna requires set-off to the extent of 500 as she is creditor of Abebe to that extent? Actually Abebe cannot refuse set-off on the ground of its being part of the debt.



Set-off and payments are not the same although both are grounds of extinction of obligation. Set-off is not mode of payment. This can be exemplified by the validity of set-off made with an incapable person and invalid nature of payment made to incapable person unless it is proved that the incapable benefited.


Contracting parties are not allowed to set-off their debts if it is going to affect the rights of third parties. Extinction of obligation by set-off “shall not affect rights which third parties have on one of the debts.” Extinction of obligation has effect only between the parties whomake  set-off.


Assume that Ato Yeselam owes to Solomon and Ato Stiffo Birr 1000 each. In another transaction Solomon owes Stiffo Birr 1000. If Yeselam and Solomon make set–off, the right of Stiffo to recover his money form Yeselam’s receivables may be at stake.  Therefore, Stiff can protest set-off, as it is detrimental to him. At least its effect on third parties shall be protected.


A bit of perplexity might be created with regard to appropriation of payments. Appropriation of payment in the case of set-off has been provided in Article 1835 of the civil code in its wording as: “Where several debts liable to set-off are owing from the same person, the set- off shall be made in accordance with the provisions of chapter 2 of this Title relating to appropriation of payments” (Art. 1752-1754 of the C.C).


When set-off is made with a person who has claims related to costs, interests and principal debt, set-off extinguishes first the cost, then the interest and finally the principal debt pursuant to Article 1752. When set-off is made against a creditor who has several claims, the debtor who wants to effect set-off may specify the debt which is extinguished by set-off. However, if the debtor, who effects set-off, does not exercise his right of specifying the subject of set-off, the person who has several claims may specify the subject of set-off among his several claims according to Article 1753.


When both parties do not specify the subject of set-off among the several claims, the law fills the gap as provided under Article 1754. Accordingly, the debt which is due or where none of them is due, the debt which shall first become due shall be subject of set-off. When there are several debts which become due at the same time, the debt which is of greater advantage to the debtor shall be extinguished by set-off. As far as debts which are of the same advantage to the creditor are concerned, such several debts shall be extinguished proportionally.


Rene David illustrates this well. Assume A owes B 1000 and B owes A 1000. B also owes another 1000 because of another transaction. All these debts are liquidated and due. Both debts extinguish reciprocally immediately when they exist simultaneously up to the amount of the level of the two debts.




Among the grounds of extinction of obligation, merger is also one. Merger in extinguishing the contractually created obligation has certain peculiar effects on the contracting parties and the third parties. This section will, accordingly, discuss merger, along with its peculiar characteristics.



Merger is another method by which obligation extinguishes. Merger happens when the position of creditor and debtor becomes one and the same. There are different reasons for merger between debtor and creditor. Successions, formation of partnership are among the juridical acts which result in merger. Merger makes the debtor and creditor the same person.


If we see Article 1842 of the Ethiopian civil code the principle of merger in extinction of obligation has been put verbally as:


Art.1842__ Principle

Merger shall occur and the obligation shall be extinguished where the position of creditor and debtor are merged in the same person.


Performance of obligation after merger is not actually realistic once the creditor and debtor become the same since performing certain obligation towards one self is actually absurd.


Assume Ato Haile borrowed 25,000 birr from his father, Ato Aklilu; however his father died before collecting the debt from his son, Ato Haile. The later is the only successor of his father, Ato Aklilu. Here we can say that Ato Haile becomes the owner of the property of his father including the 25,000 Birr. It is not feasible for Ato Haile making payment to himself. The position of Ato Haile merged with that of his father. The obligation to pay his debt is then said to be extinguished by merger.


Extinction of obligation on the account of merger has certain limitations in its effect of extinction of obligation. The limitation is when it affects the right of third parties. Merger shall not be made to the prejudice of the interest of third parties, which have a right on the debt. Article 1843 of the civil code is provided in a way such rights of third parties are enshrined.


Art.1843.__Rights of third parties

Merger shall not affect the rights which third parties may have in respect of the obligation.


The protection of the right of the third party gets its strong support from the privity principle provided in the definitional provision of Article 1675, 1731 (1) and 1952 (1). Third parties may have a right on the credit which is subjected for extinction by merger.  The right of third parties shall be protected to avoid the externality effect of merger. When third parties who have usufruct right or pledge on the credit, such right is not subject of extinction though the main obligation on which such right depends could be extinguished by merger.


For example, Ato Yidnekachew is a creditor of Ato Zinabu, his only son, for the extent of 1,000,000 Birr.  Kemal is entitled to get the interest of the debt of Zinabu by dint of another transaction with Ato Yidnekachew. If Ato Yidnekachew dies Zinabu will succeed him and the obligation of paying 1,000,000 extinguishes, as there is merger. However, the merger, which extinguishes the principal obligation, does not extinguish the obligation to pay interest pursuant to Article 1843.


Merger has certain peculiar characteristics, as obligation extinguished by merger might revive in certain circumstances. The circumstance which results in revival of obligation extinguished by merger is when the merger comes to an end. Article 1844 of the civil code has been put incorporating this connotation.


Art.1844__End of merger

The obligation shall revive where merger comes to an end.



Assume that Misganaw has borrowed 50,000 Birr from his father, Ato Alebachew. In the mean time, Ato Alebachew disappeares and his absence is declared by court. Since Misganaw is the only successor of his father, he becomes the owner of his father’s property and his obligation is extinguished by merger. After 3 years of declaration of absence, Ato Alebachew returns. In this case Ato Alebachew can claim all his properties along the credits he has with his son, which he could have claimed before the declaration of absence and before the extinction of obligation. Here the obligation of Misganaw to pay Birr 50,000 to his father is said to be relieved.


His son may not claim that his obligation to pay the money has extinguished by merger as coming of merger to an end results in revival of the extinguished obligation according to Article 1844 of the Civil Code.


Another illustration in which obligation extinguished by merger could be revived is for instance, if company X lent company Y Birr 2,000,000 but if the two companies merged into one before company Y paid its debt (merged). However, if the two companies split back to their original position, merger is said to cease and the obligation will revive on the debtor.


In addition to invalidation and cancellation, termination is also one way by which obligation is extinguished. Termination of contract is making the contract ineffective starting from the time of termination of the contract. This title discusses termination as one way of extinction of obligation. The overall meaning of termination, the difference between terminations on the one hand and invalidation and cancellation on the other hand will be discussed. Effect of termination in extinction along with its peculiar nature will also be discussed.



Types of terminations


Termination refers to the stoppage of obligations created by the contract. It ceases the existence of the obligations as of the time the contract is terminated. Termination of contract can be either, bilateral (by the agreement of both the contracting parties), unilateral by one party, or judicial ( by court order)



A) Bilateral termination



Bilateral termination refers to putting an end to a contractual obligation by the agreement of both parties. Article 1819 indicates the possibility of termination where the parties so agree. The connotation of this provision is that the parties may agree to terminate the contract mutually.


Agreement to terminate is, actually, a contract as a contract can be to extinguish obligation of proprietary nature. Termination of contract by agreement is in light with the definitional provision of Article 1675, which shows that agreement to extinguish obligation of proprietary nature is a contract.


Termination of contract by agreement can be made in two ways. The parties may effect termination pursuant to their contract provided that they have inserted such termination clause in their contract or agreed later. The termination clause may also entitle one of the parties the power of termination unilaterally. It may also put a condition upon the fulfillment of which the contract is terminated. Eventhough the parties might not agree in the contract about termination and its condition, they can also agree later to terminate the contract. Termination of contract by consent of the parties provided under Article 1919(1) includes all that are discussed above.


B) Unilateral termination


Unilateral termination is made either by the effect of agreement when such unilateral termination clause is provided in their contract and when a condition which entitles unilateral termination is fulfilled. Unilateral termination can also be made by giving notice in advance. The time of notice might be either fixed by law, by custom, or reasonably by the contractants


C) Judicial Termination


In addition to unilateral and bilateral cancellation, cancellation can also be made when one of the parties requires to that effect. Court termination is the principle and termination by the parties is an exception as parties shall not be judges on their own case.


Although termination extinguishes obligation, the way it extinguishes such obligation is different from the manner of extinction of obligation by invalidation and cancellation. Termination does not have retrospective effect; rather it has prospective effect. This means, extinction of contractual obligation by termination of contract works only in the forwarding direction from the time the contract is terminated regardless of its type.


We have seen termination which can be made by agreement either together in the contractual agreement in the contract or independently after the contract and without agreement unilaterally by either parties as well. Moreover, a contract can be terminated by the court, as it can be inferred from Article 1823 and 1824.


Article 1823_  Special relation between the parties

A party may apply to the court to order the termination for a contract, which requires a special confidence, cooperation, or community of views between the parties and where such requirements are no longer present.


If the previous confidence, cooperation or community of view that helps the continuity of the contract ceases, the contractual relationship might not be worthy upholding. In this connotation an application may be made to the court to that effect. The court has actually the discretion to the extent of identifying whether the requirement of special confidence, cooperation or community of view ceased or not.


In addition to the cessation of special relation between the parties, gratuitous contracts also entitle the party who has made such grant the power of having the contract terminated by requesting court order. Article 1824 has provided the above connotation as:


Art. 1824__ Gratuitous contracts.

The court may order the termination of a contract made for the exclusive advantage of one party where the other party for good causes so requires.


The provision has provided certain requirements so that the contract is terminated. Primarily. The contract shall be for gratuitous in that the contract is made for the exclusive advantage of one party; it shall not be for consideration. There shall be good because that makes the party require termination. The requirement of good cause is not alterative requirement rather it is cumulatively required so that such contract can be terminated.


Whether the party has good cause to terminate the contract or not is to be decided by the court and thereby needs interpretation. Good cause shall be interpreted to mean a cause for the existence of the contract such special relationship that fosters such contract and other causes which are relevant to the case.


Let us illustrate this by taking a hypothetical case. Ato Abebe gratuitously assumed the obligation of giving 300 Ethiopian Birr for his unemployed brother. Ato Abebe can have the contract terminated starting from the time his brother got a job elsewhere. In this hypothetical case the employment of his brother can be a good reason if Ato Abebe entered into that contract for the exclusive advantage of his unemployed brother thinking of his unemployment.



Similarities and differences between invalidation and cancellation on the one hand and termination on the other


The basic difference between termination on the one hand and invalidation and cancellation on the other is their effect. The ground of termination is not again attributable to defect in the formation of a contract or non-performance on one of the parties. Termination can be made by agreement, unilaterally by one party or by court order. However, the grounds of invalidation and cancellation are defect in consent and non-performance in accordance to the terms of the contract respectively. In relation to the effect of the two categories as stated above, invalidation and cancellation have retrospective effect while the effect of termination is prospective. Article 1819 Sub (2) and (3) are obvious in indicating the prospective nature of termination. Quite the reverse, Article 1815 is testament for retrospective effect of invalidation and cancellation.


Let us take an example of this and assume that Ato Ahmed agreed with a coffee trader in which he agreed to pay the trader 300 birr per quintal in consideration to get 100 kgs of coffee every month. If the contract is terminated the parties are not required to give back what they have given to each other. And they are no more required to carry out their obligation as of the time of termination.


If the contract is invalidated or cancelled, however, Ato Ahmed shall give back 100 kgs of coffee of every month and get back his money. If the coffee is consumed the restitution effect of invalidation or cancellation can be difficult. However, the restitution effect is still effect of invalidation and cancellation unlike termination. Invalidation, cancellation and termination are the same in that they extinguish contractual obligations.


Remission of debt


Along with termination, remission of debt is also one way of extinction of obligation. Remission of debt is voluntary release of debtor of his obligation by the creditor. Article 1825 is testament for the extinction of obligation by remission of debt under the Civil Code.


1825__ Remission of debt.

Where the creditor informs the debtor that he regards him as released, the obligation shall be extinguished unless the debtor forthwithinforms the creditor that he refused his debt to be remitted.


According to Article 1825 of the C.C the mere willingness of the creditor to release the debtor by remission is not enough to make the remission effective and result in extinguishing of obligation. The willingness of the debtor to that effect is also required.


However, the provision does not put express acceptance of the remission as a mandatory requirement. The debtor shall object when he is informed of the remission if he wants the remission not to be made. Unless such protest is made the law seems to presume silence as acceptance in the case of an offer to effect remission of debt to the debtor.




Previously we have seen that remission of debt and termination of contracts are among the ways by which a contract is extinguished. Novation is also one way by which a contract is extinguished. This title is allotted to cover the extinction effect of novation. Heres the meaning of novation, the effect of novation on principal and collateral obligation will be discussed.


Before discussing the effect of novation, it is worth knowing what novation is.  When we look at the civil code,  there is no direct definition of novation. A thorough reading of Article 1826, however, sheds  light on what novation is.


Article 1826__ principle.

An obligation shall be extinguished where the parties agree to substitute therefore a new obligation which differs from the original one on account of its object or nature.


Consistent with this provision, novation is substitution of an existing obligation by new obligation in its nature or object. The new obligation shall be different from the substituted obligation either by its object or nature.  Mere difference without substantial change either in the object or in the nature does not amount to novation; rather it is variation in fact.


Assume for example that Mr. Kemal entered into a contract with Lelisa to deliver 100 kilos of sugar in Addis Ababa. Later they agree to change the place of delivery to be Mekelle. After sometime again both parties agree delivery of 100 kilos of sugar to be replaced by 50 kilos of coffee.


Do you think that one or all of them are novation or not?  The change of place is not novation. Neither the nature nor object of the original obligation is different. Change of sugar by coffee is, however, novation as the object of the contract has been substituted.


When original obligation is different from the substituted obligation in its cause it is also considered to be novation. Illustrative example has been provided by Rene David:


“Suppose, for example, that B owes A $10,000 for some goods he purchased from him; it is agreed later in the new contract that B will keep the $10,000 as a loan from A. This is novation by change in the cause: B’s debt has the same object, but henceforth,  it has a different cause. B owes $10,000 because A lent it to him, not because he purchased the goods from him.


Novation is required to be intentional so that it can have the desired consequence in accordance with Article 1828.


Article 1828__ intention to extinguish the original obligation.

Novation shall not occur unless the parties show the unequivocal intention to extinguish the original obligation.


Replacement of certain obligation with other obligation in the absence of intention to make novation does not have the effect of novation. Actually knowing intention can be of certain impenetrability, the apparent activities of the parties can be inference for the presence of intention, though. The apparent acts of the contracting parties can be used as an inference to reach conclusion regarding the presence of intention.


The negative meaning of novation in Article 1829 helps to explain it by providing cases ; novation may not occur as stated below.


Article 1829 __Absence of novation.

Unless otherwise agreed, novation shall not occur where;

a) a new document is prepared to support an existing debt; or

b) the debtor signs a promissory note or bill of exchange in respect of an existing debtor

c) new securities are provided to ensure payment of an existing debt.


All the acts provided in Article 1829 do not show substitution of an existing obligation with a different obligation in its nature or object. Preparing of a new document to support an existing debt, signing of a promissory note or bill of exchange in respect of an existing debt does not show novation and nor does providing securities to ensure a debt show ovation.


There might be ambiguity as to whether the lists of 1829 are exhaustive or not. In relation to this, whether signing a promissory note or bill of exchange excludes signing other negotiable instruments might create perplexity. Albeit the presence of such ambiguity, Article 1829 is on illustrative list by which other acts, which are not novation, are included.


Its illustrative nature is also strengthened by the definitional provision of Article 1826 and the additional illustration of absence of novation in Article 1830. Had Article 1829 been exhaustive the definition would not have been necessary as the definition is wider in scope than the negative meaning of novation in Article 1829. Moreover, positive meaning of novation in Article 1830 would have been again unnecessary had it been exhaustive. Because if it is exhaustive the contraries reading of 1829 would tell us that acts other than the lists of Article 1829 are novation.


When we see Article 1830, it incorporates negative and positive meaning of novation in case of entry of credit and debit in current account.


1830- Current account.

(1) Novation shall not result from entry of credit and debit items in a current account.

(2) Novation shall occur where the balance of an account is finalized and admitted.

(3) Unless otherwise agreed, the creditor shall retain such securities as may attach to one of the items entered in a current account not withstanding that the balance of the account has been finalized and admitted.


Sub Article (1) of Article 1830 shows that mere entry of credit and debit items in a current account does not show novation. Parties who have contractual relationship of current account are usually expected to make their balance debt and credit that will later be finalized and admitted. Entry of debit and credit in a current account before finalization and admittance does not show novation although it might resemble it.


In sub Article 2 of 1830 however, the presence of novation has been denoted when the balance is finalized and admitted. After the debits and credits are calculated and put in a final result, the contract would be clear with their position either as a debtor or creditor. The contractants would either admit the final result or oppose.


If they or one of them protest, further analysis would be made by the contractant and other relevant professional. Once the final result is admitted, novation is presumed to have been made. The obligations in respect of specific items have been, after admittance, substituted by the analyzed upshot of debit and credit in the current account. The connotation behind such novation is that a debt in respect of certain item in a contract of current account is replaced by the final result of finalization and admittance. The nature of the obligation is changed.


Novation in current account does not, however, result in all the effects of novation according to Article 1830.  Securities attached to one of the items entered in a current account do not extinguish even after novation unless there is contrary agreement. Had it been novation other than in current account, however, securities would have not been transferred to the new obligation because of novation. Extinction of collateral obligation as one effect of novation has been provided under Article 1827.


1827- Effect of novation

(1) Unless otherwise expressly provided, securities or privileges attaching to the original obligation shall not be transferred to the new obligation.

(2) Unless otherwise expressly provided interest due prior to novation may not be recovered there after.


Novation in its effect does not extinguish only the principal obligating but also the accessory ones. Accessory obligations in pledge, mortgage and personal guaranty are extinguished as the principal obligation extinguishes by novation in accordance with the aforementioned provision.


Let us illustrate this by taking on example. Assume that Ato Lelisa bought a track from Mesfin industrial engineering on loan. He has assured payment of his debt (price of the track) by providing a guarantor. If later novation is made whereby the price of the track is to be substituted by one-year service, obligation to pay the price of the car is extinguished. The guarantor’s obligation of paying the price when the principal debtor fails also extinguishes, as it shall not transfer to the new obligation. It must be born in mind that if the guarantor agrees to that effect, his accessory obligation is upheld.


However, if the contract of sale of track is made in the course of contract of current account, the price of the track is entered in debit or credit item in the current account. At this time its entry in debit or credit item does not amount to novation. Once the price of the track is calculated, finalized and put in sum, the parties are expected either to admit or protest. Still there is no novation till the parties admit.


After admittance novation takes place. The debt in the form of price of a track has been replaced by the sum, which is said to be novation in its nature. Be that as it may, the obligation of the guarantor to pay the price of the track, if Ato Lelisa fails to pay, does not extinguish. It is rather transferred to the new obligation, which comes about as a result of finalization and admittance.


In addition to that as novation creates new obligation, the effect of period of limitation is different as to the new obligation from the previous obligation. There might be even difference in the duration of the period of limitation. Assume Lemlem cheru had the obligation to pay 50,000 Birr for Dashen Bank before 8 years. After the lapse of 8 years if the parties agree to replace the obligation to pay 50,000 birr by 10 months consultancy service, a new period of limitation starts to run and the defense on the lapse of period of limitation based on the original contract does not work.


An already formed contract creates obligation of proprietary nature among the contracting parties. These obligations rarely exist forever without being extinguished. Sometimes after the formation of the contract, the contractually created obligations extinguish because of different reasons.


Having appreciated the formation and effect of contract, it is worth discussing extinction of obligation. Extinction of obligation connotes the stoppage of already existing obligation. In light of this, this chapter deals with the grounds on which on already created obligation is extinguished.


In so doing, the ways by which obligation extinguishes will be discussed in a detailed manner. According to Article 1806 of the Civil Code (C.C), there are different grounds which cause extinction of obligation. Cumulative reading of Articles 1806 and 1807 of the C.C takes performance, invalidation, cancellation, termination, novation, set off, period of limitation of a contract, and merger as grounds of extinction of obligation. Each way of extinction of obligation has been, accordingly, discussed in different sections.


While discussing the grounds of extinction, their meaning, the difference among them and with other ambiguous terms, effect on the contractants and third parties, effect on the main obligation and on the collateral obligation will be discussed.



Performance of contract


Performance of obligation is not only an effect of contract but also a ground of extinction of obligation. Performance of the contract shall however be made according to the terms of the contract and mandatory provisions of the law if it shall extinguish contractual obligation. It shall be performed according to the agreement without discrepancy if it shall bring the contractual obligation to an end.
If someone agrees to deliver his Mercedes car but actually delivered a vitara, the obligation is not extinguished. Extinction of obligation by performance of a contract needs performance of a contract in a legally required conformity.

Invalidation and cancellation of a contract


Invalidation of contract is one means by which contractual obligations are extinguised. Invalidation of a contract happens when there is defect in the formation of the contract. If a party that is incapable concludes a contract or if one of the parties concludes the contract without having the legally required consent, the contract is subjected to rescission. Hence, what do you think the difference in grounds and effect of  invalidation and cancellation of contracts?



This title discusses invalidation and cancellation as one mechanism by which obligation extinguishes. The discussion in invalidation and cancellation covers the meaning, grounds, entitled parties, time limitation,and effect of invalidation and cancellation. The party, which is entitled to invalidate the contract along with other rights and duties of the party, has been dealt with.


It has incorporated the effect of invalidation and cancellation when the whole contract and part of the contract is invalid and its effect on third parties whose right might be affected by the effect of invalidation and cancellation. It also includes issues with reference to the position of Ethiopian law of contract towards void and voidable contracts.


Invalidation means making an effective contract ineffective when it has a problem in its formation. Invalidation is related with the problem in the formation of the contract. Invalidation comes into question when one of the parties wants to be free from the contractual obligation owing to a problem in the formation of the contract.


Therefore the mere presence of willingness of one party to have a contract invalidated is not enough. In addition to that, the legally provided grounds shall also be fulfilled. Lack of capacity and lack of sustainable consent are among the grounds that render a contract invalid.


The nature of invalidation of a contract is reflected in its effect. Now that invalidation of contract takes us to the conclusion that the contract is not properly formed, the effect of contract is said to be restitution. The contracting parties are put to the place where they were before the formation of the contract.


Sometimes compensation might be ordered when a contract is invalidated. This might lead us to the conclusion that the effect of invalidation and cancellation is the same in compensation. However, the damage following from an invalidation of a contract shall aim at putting the contracting parties in a place they would have been had the contract not been formed.


Cancellation on the other hand is making a contract ineffective when there is non-performance. Cancellation of a contract is one effect of contract in that the contract is formed within the legally provided requirements. When one of the contracting parties fails to perform a contract the other party might cancel the contract as one remedy of non-performance of the contract. There might be again other grounds of cancellation like the condition which results in cancellation.


The other basic difference between invalidation and cancellation is their ground. The ground for invalidation is defect in its formation while the ground for cancellation is non-performance. This does not, however, mean that the only difference is in their ground. They are also different in their effect. Eventhough the effect of both invalidation and cancellation is restitution, cancellation additionally entitles the party a compensation that rewards the benefit of contract.


Unless the invalid contract is invalidated, the contract is upheld and becomes effective. Eventhough the contract might not be performed, the remedies of non-performance will be due. Under Ethiopian law of contract anybody that wants it to be invalidated cannot invalidate a defective contract. It shall be the party who is affected by the invalid contract that can invalidate the contract. Article 1808 (1) of C.C is provided to this effect stating in its wording:


“A contract which is affected by a defect in consent or by the incapacity of one party may only be invalidated at the request of that party”


The basic reason to entitle the party that is affected by the invalid contract the power of invalidating the contract is to protect the interest of that party. The other party whose consent is not affected or who is not incapable is considered to have full information or rationality behavior. Unless he suffers from information asymmetry or was irrational at the time of the formation of the contract there is no reason to help him by empowering him to invalidate the contract.


This does not, however, mean that no one other than the party who is affected by the contract can invalidate the contract. Representative of a party who gave his consent either by defect in consent or under incapacity can invalidate the contract. Representatives of the party, that is potential to be adversely affected by the invalid contract might be in a position of enforcing the rights of the party. If for example a minor enters into a contract, the minor may not necessarily invalidate the contract by himself. His tutor can invalidate it, as his tutor is his legal representative.


In sub-Article two of this provision, however, any party is entitled to invalidate an invalid contract in the definition of this provision. Article 1808 sub Article (2) connotes that “A contract whose object is unlawful or immoral or a contract not made in the prescribed form may be invalidated at the request of any contracting party or interested third party”.  This provision is not clear in its position as to a contract whose object is not sufficiently defined and whose object is impossible. Whether such contract is included under this provision is a gap to be filled by interpretation.


When we generally observe the sprit of the provisions, contracts whose object is not sufficiently defined, impossible and which are not in a prescribed form seems to be incorporated by analogical interpretation. In spite of the fact that sub Article (1) of the provision does not include a contract which is defective owing to the aforementioned grounds, its exclusion does not mean that such contracts are valid.


If such contracts are not valid the effect of a contract whose object is invalid or immoral is the same with the effect of contract whose object is not sufficiently defined, made in a prescribed form, and whose object is not possible. Articles 1714 (1), 1715(2), 1716(2) and 1720(1) clearly show that the above mentioned grounds shall render the contract ineffective.


Capacity and consent do not, however, render a contract ineffective. These grounds rather entitle one of the parties the power either to invalidate the contract or give it effect. Therefore since the grounds provided underArticles 1714 (1), 1715(2), 1716(2) and 1720(1) are similar in rendering the contract defective, it is advisable that Art.1808 (2) shall include a contract whose object is not sufficiently defined, and not possible by analogical interpretation with all the criticisms.


In addition to insufficient coverage, the provision seems to connote that void contracts are subjected to invalidation as the phrase “… may be invalidated at the request of any contracting or any interested party…” is put to that effect. Its being under the title of extinction of obligation, along with this provision also leads to the conclusion that unless void contract is invalidated, the obligation created is not extinguished. Eventhough this seems a logical conclusion which takes its premises from the title of Chapter 3 and Article 1808 (2), giving effect to an illegal or immoral contract is not only absurd but also in contrary with 1714 (1), 1715(2), 1716(2) and 1720(1) of the Civil code which shows that such contract shall be of no effect.


However, the concept of invalidation depicts making a potentially effective contract ineffective. A contract, which is not invalidated, is required to have effect like any other contract. It is this effect of invalid contract that begs its invalidation to make it ineffective and correct the error it imposes on contractants. If the contract is void, however, it does not have legal effect from the very beginning.


Provisions that cover the requirements whose absence renders a contract void vividly shows the ineffective nature of such a contract.  Under Article 1714- it has been vividly stated that the contract shall be of no effect by law not by invalidation if “the obligation of the parties or one of them cannot be ascertained with sufficient precision.”


Article 1715 again renders a contract, whose object is impossible absolutely and insuperably ineffective. Similar connotations have been incorporated in Articles 1716, 1717 and these provisions in effect show that the contract is no more effective.


Noncompliance of formal requirements also renders a contract void or ineffective. We can infer this from Article 1720 in that a contract which is not made in the prescribed form is not a contract; it is rather a mere draft. From this inferred conclusion it is not illogical to infer that a contract, which is not made in a prescribed form does not have legal effect. For someone’s amusement this provision even says that it is not a contract but rather a mere draft. Invalidating an agreement which is not contract seems to be absurd.


Having the above affirmation in mind, Article 1808 seems to be in contradiction with the very nature of invalidation that is rendering a contract ineffective and with the provisions, which deal with the effect of noncompliance of the requirements. This provision is also on the grounds of extinction of obligation. Invalidation of a contract is one of the grounds. Unless a contract, which shall be invalidated, is not invalidated, the obligations created are not extinguished in the absence of other grounds. It is questionable if this is true for a contract whose object is undefined, unlawful, immoral or impossible. From the very beginning no legal obligation is created under such contracts


If it does not have legal effect there is no need to have such agreement invalidated. There is not any created obligation to be extinguished by invalidation. Such nature of void contract casts doubt if invalidation of such contract really extinguish obligation as void contracts do not create effective obligation as it has been seen before. Be that as it may the invalidation of contracts which have no effect by the function of law, has been put under the extinction of obligation by invalidation.


An invalid contract can result in the extinction of contract eventhough it is not invalidated. Notwithstanding the fact that a contract is invalid, the reaction of contracting parties to a contract is not necessarily invalidation. Contractants can also resort to other options like refusing performance without having the contract invalidated.


Article 1809 denotes that a party entitled to invalidate a contract can refuse performance at any time. The contracting party can extinguish the obligation by refusing performance of a contract. Albeit the absence of the act of invalidation the obligation will thereby be extinguished. The right to refuse performance seems, however, to be made at any time without any prescription.


The right to invalidate a contract is, however, limited by lapse of a certain period of time. Article 1810 connotes that a contract shall not be invalidated unless an action to this effect is brought within two years from disappearance of the ground for invalidation. This provision seems to be prohibiting invalidation even if the period of limitation is not raised, as it says, “… no contract shall be invalidated.”


It is consequently doubtful if the court can on its own motion prevent invalidation when it is cognizant of the lapse of time although prescription is preliminary objection which shall be raised at the possible early stage. The question whether the period of limitation is not preliminary objection in the aforementioned case casts perplex doubt as substantive law has overriding importance over procedural matters and the procedural laws refer to the substantive laws to determine whether certain objection is preliminary objection or not.


The time from which two years is counted starts from the disappearance of the ground for invalidation excepting unconscionable contract for which the starting point is the formation of the contract. If the ground for invalidation is a mistake, two years from the knowledge of the misperception or erroneous understanding, if the ground is duress, two years from the avoidance of the threat, and if the ground is incapacity from the time the incapable becomes capable are the points where counting starts.


Assume that a 15 year old boy enters into a contract. He can invalidate the contract within two years after he attains the age of 18. He can invalidate it within five years from the formation of the contract in this specific case.


The beginning for the two years of the period of limitation is different when the ground is unconscionable nature of contract. Article 1810 (2) says in its wording as:


Where a contract is unconscionable and the party injured is of age, the action shall be brought within two years from the making of the contract.


The point from which we count the time is not the time at which the ground disappears but the time of formation of the contract.


The presence of invalid contract does not necessarily mean that the contract will be invalidated and the obligation will be extinguished. There are circumstances where the contract is upheld. Confirmation by the injured party is one among the circumstances. Article 1811 indicates “the party whose consent was vitiated may waive his right to require invalidation where the cause which vitiated his consent disappeared.”


The confirmation can set free the contract from invalidation if the confirmation was made after the cause which vitiated the consent disappeared. The 15 year old boy can confirm the contract and avoid invalidation after he attains 18 years old.


If the invalid contract due to defect in consent was made in special form, confirmation shall also be in special form so that the confirmation is to be valid. A contract for the formation of which form is a mandatory requirement shall also be confirmed in the same form.


Eventhough an invalid contract can be confirmed by the injured party, there are certain circumstances where the contracting party of the injured party may make the contract effective even against the will of the injured party. Where the invalidity is owing to unconscionable nature of the contract, the other party against whose will invalidation is required can put the action to an end by making good the injury pursuant to Article 1812.


Art.1812. Putting an end to action.

Where a party requires the invalidation of an unconscionable contract, the other party may put an end to the action by offering to make good the injury.


The connotation enshrined here is that once the element of unconscionable nature of a contract that is unfair consideration is made good, the contract shall be effective. Amendment of a contract as effect of invalid contract is also connoted under this provision.


The presence of grounds for invalidation does not necessarily imply complete invalidation of the contract. When only part of the contract is invalidated, only that part is invalidated provided that such invalidation does not affect the essence of the contract.


The party who has the right to invalidation is imposed with certain obligation aimed at protecting certainty as to the fate of the contract. Article 1814 entitles a party whose contract can be invalidated to require if his contractant intends to confirm or cancel or invalidate a contract. When such inquiry is forwarded for the party with the right of invalidation or cancellation, he is duty bound to respond. If the party fails to respond, the contract is presumed to have been invalidated. Failure to respond gives the other party the right to make a contract ineffective.


When an obligation of a contract extinguishes owing to invalidation and cancellation there are certain effects which are worth discussing. For the most part, the effect of invalidation and cancellation of contract is extinction of a contract. After a contract is invalidated or cancelled the obligations created by the invalidated or cancelled contract disappears. There is no more contractual obligation to be discharged.


Extinction of contractual obligation does not however mean that there is not any obligation left to be carried out by the obligation. If one of the parties or both have discharged their obligations, invalidation or cancellation will create obligation of effecting restitution.


Article 1815 is provided with this implication as:

Art.1815__ effect of invalidation or cancellation

(1) Where a contract is invalidated or cancelled, the parties shall as far as possible be reinstated in the position which would have been existed, had the contract not been made.

(2) Acts done in performance of the contract shall be of no effect.


From the above Article do you think the effect of invalidation and cancellation are the same? If not what are the differences and the rational behind it?


According to sub Article (1), the parties are required to be put in their original position before the formation of the contract. The parties are expected to be with their original properties before the contract. After the formation of the contract the parties are put in different position because of the newly created obligation. All or part of the obligations might have been performed.  If invalidation or cancellation happens the parties are put in their previous position in that the performed obligations are reinstated.


Sub Article (2) confirms the above assertion putting specific effect. Any party who has performed can invalidate the performance. Someone who has given something to discharge his obligation can reclaim the thing given. A party who has given a car in consideration of price shall give back the car and take back his money.


A question as to whether cancellation and invalidation are the same, excepting a titular difference, may be raised if the effect of both is reinstatement under the law of contract of Ethiopia. Although cancellation might be followed by compensation, invalidation can also be followed by compensation according to Article 1817 (2), as it shows that payment of compensation shall be made for parties to reinstate them.


However, difference still exists in their effect as cancellation paves the way for compensation that puts the victim in the place he would have been had the contract been performed. Article 1790 (1) shows that damage shall be made good for injury of non-performance of contract. When the reason of damage is non-performance perfect expectation damage is understood. The possibility of forced performance and damage together strengthens the inclusion of perfect expectation damage.


Invalidation is, on the other hand, followed by compensation that puts the victim in his original position. Such effect also exists in Ethiopian law of contract pursuant to Article 1817 which shows that the compensation shall be aimed at reinstating the party in his original position. Eventhough this provision is equally applicable to cancellation, cancellation can also be followed by additional damage pursuant to Article 1790.


The reinstatement effect of invalidation and cancellation is not made without limitation in a way it hinders security of transaction in parties which have no and are not expected to have information about the cancellation or invalidation. An act that is made in performance of a contract is not subjected to invalidation if such invalidation affects the interest of third parties. Article 1816, which protects the right of third parties, aims at the said purpose saying:

Art.__ Rights of third parties.

Acts done in performance of a contract shall not be invalidated where the interest of third parties in good faith requires.


Some discussion as to who can be a party in good faith is necessary here. A party who does not know the invalid nature of a contract or about the cancellation of the contract whose invalidation or cancellation would affect his interest is in good faith. A party who is not reasonably expected to know is also in good faith.


If Mr.  Habtamu bought a car from Mrs. Meselech and Mrs. Meselech previously has the car on account of invalid contract with Ayalew, Mr. Ayalew cannot invalidate the contract unless Mr. Habtamu is proved to know the invalid nature of the contract between W/ro Meselech and Mr. Ayalew.


Impossibility of restoring to the previous position is also another limitation on the reinstatement effect of invalidation and cancellation. Thorough reading of Article 1817 states that acts done in performance of the contract shall be upheld if there is impossibility, serious disadvantage or inconvenience of invalidation to cause to one or both parties.


Someonewho has bought bricks on account of invalid contract and used the brick in building may refuse reinstatement since reinstatement creates serious disadvantage, inconvenience. It is even impossible to take the bricks back as they were.  Sub Article (2) has provided a solution to alleviate the inconvenience by monetary compensation or any other remedy which the court thinks fit.


Restoring to their position pursuant to Article 1818 has been ordered to be applied referring to unlawful enrichment. Someonewho has bought a small house on account of invalid contract may construct another house. If restitution is ordered, the party may require payment for the additionally constructed house in accordance to unlawful enrichment.


Historical development of contract law

This section provides a very brief account of the historical development of contract law. The historical development of contract law can be under stood in terms of the conceptual foundations of obligations, which was traced back to ancient and classical Roman law.  However the foundations of the present day law of contract were laid in the 19th century. This period in history saw the rapid expansion of trade and industry inevitable resulting in the increments in the volume of commercial disputes as a result people turned to the court of law for solutions. Gradually, there developed a body of settled rules which reflected and of the disputes from which they arose and the prevailing belief of the time.  However, this rules and belief are affected by the dominant economic philosophy, the so called the laissez-faire individualism-the view that the state should not meddle in the affairs of business and that individuals should be free to determine their own destinies. This philosophy was mirrored in the law of contract by two assumptions-freedom of contract and equality of bargaining power. According to freedom of contract theory it is assumed that everyone is free to choose which contracts they entered into and the terms on which they wish to do so. According to equality of bargaining power theory, the parties were deemed to have equal power to bargain on their business and deemed to be of equal bargaining strength.

These theoretical foundations of contract law produced an acceptable legal framework for the regulation of business transaction that resulted in the crystallization or codifications of contract laws across the world. The two theories did also define the role of the courts. Courts were required to enforce the agreement of the parties, as it was without questions its fairness etc. Over years the freedom of contract theory though maintained at present is subjected to different limitations. The theory of equality of bargaining power had brought certain unnecessary results because parties to a contract do not necessarily have equality. For example, employers and employees, producers and consumers, lenders and borrowers do not have equal power in the negotiations. Employees, for example, did not have equal bargaining power with employers, and as a result entered in to contracts the terms of which were more favorable to the employers (employees were supposed to work for as long as 16 hours per day & more, less wages etc). Courts were simply required to enforce such terms. This led to dissatisfaction, riots, unrest etc calling for government intervention. Thus, governments do lay down the minimum conditions for enforceable employment contracts. Today, we find the law of contract providing the conditions for the making and enforcement of contract. However, we should note that the theory of freedom of contract and equality of bargaining power are still the foundations of contract law in many legal systems.

The Economic Analysis of Contract Law

This section is intended to introduce an emerging discipline of law and economics as applied in contracts. The economic analysis of contract law provides a new paradigm into contract law in terms of both defining the concept and the economic function of contract & contract law. As the subject is vast to cover in this material, we have opted to consider some of the concepts and assumptions suggested by leading scholars (Look ‘Economics of Contract Law’ by Kronman and Posner (1979) for further understanding).

One fundamental economic principle is that if voluntary exchanges are permitted-if, in other words, a market is allowed to operate-resources will gravitate towards their most valuable uses. The exchange will make not only the parties better off but will also increases the wealth of the society, assuming that the exchange does not reduce the welfare of nonparties more than it increases the welfare of the parties. The existence of the market-locus of opportunities for mutually advantageous exchanges-facilitates the allocation of the good or service in question to the use in which it is most valuable, thereby maximizing the wealth of society.

It is assumed that individuals are rational maximizes of their own self-interests. That is, they will respond to other people and to events in a way that increases their own utility. It is this, which lies behind the notion that individuals will trade resources until the resources reach the people who value them most highly. Economists express the idea that something may be worth more to one person than to another by saying the first will be prepared to pay more for it than the second. However, they use the word “utility’ rather than ‘wealth’ because the theory does not assume that everyone is selfishly pursuing greater personal wealth. Individuals may well like to see other individuals made better off and be prepared to give some of their own wealth to achieve that. An economist fits this into his general theory by saying the donor’s ‘utility’ is increased by seeing the donee made better off.

The basic economic function of contract law is to provide sanction for reneging, which, is in the absence of sanctions, sometimes tempting where the parties’ performance is not simultaneous. During the process of an extended exchange, a point may be reached where it is in the interest (though perhaps short-run interest) of one of the parties to terminate performance. If A agrees to build a house for B and B pays him in advance, A can make himself better off, at least if loss of reputation (which, depending on A’s particular situation, may be unimportant to him) is ignored, by pocketing B’s money and not building the house. The problem arises because the non-simultaneous character of the exchange offers one of the parties a strategic advantage, which he can use to obtain a transfer payment that utterly vitiates the advantages of the contract to the other party. Clearly, if such conduct were permitted, people would be reluctant to enter into contracts and the process of economic exchange would be retarded. Hence, the basic function of contract law to provide a sanction for breach of promises.

A non instantaneous or extended exchange creates not only strategic opportunities that parties might try to exploit in the absence of legal sanction, but also uncertainty with regard to the conditions under which performance will occur. This uncertainty exposes the parties to the risk that the costs and benefits of their exchange will turn out to be different from what they expected. An important function of contract law in this regard is to enforce the parties’ agreed upon allocation of risk.

A related function is to reduce the costs of the exchange process by supplying a standard set of risk allocation terms for use by contracting parties. Many substantive rules of contract law are simply specifications of the consequences of some contingency for which the contract makes an express provision. If the parties are satisfied with the way in which the rules allocate the risk of that contingency, they have no need to incur the expense of writing their own risk allocation rule in to the contract.

Though the questions ‘what is contract?’ and “what is contract law?” are of paramount importance, it is difficult to give a definitive answer to either. But one may say contract law is most obviously the law relating to agreements or promises. It is primarily concerned with agreements in which one party, or each party, gives an undertaking or promise to the other. It governs such questions as which agreements the law will enforce, what obligations are imposed by the agreement in question and what remedies are available if the obligations are not performed. Thus contract law is the law based on liability for breach of promises. However, ‘Contract law’ is also used to mean the whole collections of rules, which apply to contracts, and these includes many rules, which are not contractual in the sense of being based on a promise to do something. For example, if one party induces the other to enter a contract by fraud or misrepresentation, the innocent party may avail himself of certain remedies based on the rules of misrepresentation (fraud). There are certain conceptual differences on whether such rules are part of contract law or tort.

Contract law is primarily concerned with supporting the social institution of exchange. However, it is not as broad as the institution itself. An enormous proportion of our life is carried on the basis of exchanges that are in some sense agreements, but many of them are not governed by what is usually thought as contract law. Some agreements, such as domestic arrangements, are not governed by law at all.

What is a contract? In Anglo-American legal systems defines contract as a promises or set of promises for the breach of which the law gives a remedy or the performance of which the law recognizes in some way as a duty.  However, not all promises give rise to contracts. For instance, if you agreed to keep the house tidy while your parents are away on holiday you would not expect to find yourself in the court of law being sued for the breach of contract if you failed to do so. So, what kind of agreements does the law recognize as creating enforceable   rights and duties?  To answer this, we need to look in the rules of each legal system, which provide their own specific definitions of the term contract and its elements. For instance, the French civil code defines contract in article 1101 as an agreement to establish, vary, and extinguish rights and obligations of the parties. When we come to the Ethiopian legal system, we find the definition of contracts (enforceable agreements) under Article 1675 of the Ethiopian Civil Code. As such contract is defined as;

‘’An agreement whereby two or more persons as between themselves create, vary or extinguish obligation of proprietary nature’’.

This definitional article plus Article 1678 on elements of contract tell as in general the type of agreements enforceable by the law of contract in Ethiopian legal system. In the next chapters, you will study the details.

Purpose of the contract law

Contract law is primarily concerned with supporting institutions of exchange, which is an enormous part of our life carried on the basis of that are in some sense termed as agreement. Contract law has many purposes but the central one is to support and control the millions of agreements that collectively make up the market economy, and hence operates in the context of dispute resolution mechanism. Besides it empowers the parties to make agreements that the law will enforce. It also enables parties to the contract to make exchanges that might otherwise carry too great risk whether of disruption by some contingencies or default by the other party. Accordingly, contract law in this respect is the most important which creates smooth functioning of business transaction by creating certainty, predictability, and enforceability.

In this context, it is also important to note the different approaches to contract law determine its role. In the nineteenth century, at least in common law legal systems, the courts seemed to place great emphasis on freedom of contract. During this period the courts tended to reduce the numbers of rules controlling contract power. They see the role of contract law as enforcing the agreement of the parties. There are still writers who suggest that the law should enforce any agreement which was ‘freely made’ between the parties provided it has no adverse effect on others. These “libertarians” see the individual as the best judge of his or her own interest and consider that what was freely agreed is by definition, fair. Any attempt to use contract law to influence substantive outcomes (e.g. to try to produce a fairer distribution of wealth in society, or even to maintain the previous distribution) is both illegitimate and misguided.

Others take a less extreme position. They agree that individuals should be free to pursue their own self-interest but they recognize that in some cases ‘the market’ may not operate efficiently. For example, in cases where there is some kind of monopoly or where one party does not fully understand the contract, the law may need to intervene. Many such writers would say the contract law, whether we like it or not, does affect the distribution of wealth in society and that this should be recognized. A few writers go further and argue that it is no longer adequate to describe the law of contract as primarily concerned with supporting voluntary exchange in the market and correcting occasional abuses or market failures. In their view another transformation has taken place and the modern law’s prime concern is with controlling domination and promoting fair exchange and co-operation. When you deal Ethiopian law of contract, you need to assess which approach is adopted in the Ethiopian legal system.

Scope of Contract Law

The scope of contract law varies from country to country and from legal system to legal systems depending on the types of obligations they govern. Unlike non- contractual obligations in which a person undertakes an obligation not to wrong another by conduct that the law of tort establishes as wrongful, contract law governs contractual obligations which arises from agreements made between two or more persons which puts the promisor under the obligation to perform his or her promises under the sanction of an action against him for breach of the contract.

A contractual obligation implies the existence of an ‘obligor’-the person who is legally under the obligation and the ‘obligee’ for whose benefit the obligation exists. This feature of contract distinguishes contract law from criminal law obligations.

Moreover, contract law may have a general or special application depending on the nature and origin of contractual undertakings at a given time. Therefore, based on the scope of application of contract law contract laws may be dissected in to two areas of applicability complementing each other. For instance, article 1676(1) of the Ethiopian civil code stipulated the application or scope of general contract to apply to contracts regardless of the nature thereof and the parties thereto. Thus, the general rules of contract law apply to all contracts. However, the provision also recognizes that special provisions, as laid down in Book V of the Civil Code and the Commercial Code, may be applicable to certain contracts. The law also stipulates that the relevant provision of the Civil Code, Book IV title XII, shall apply to obligations notwithstanding that they do not arise out of contract. Accordingly, contract law may be applicable to extra-contractual obligations, unlawful enrichment obligation and so on. However, the scope of application of this law does not affect the special provisions applicable to certain obligations by reason of their origin or nature (Art. 1677(2)).

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