- Details
- Category: Contract Law
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.
Novation
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.
- Hits: 32382
- Details
- Category: Contract Law
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.
- Hits: 24232
- Details
- Category: Contract Law
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.
- Hits: 16114
- Details
- Category: Contract Law
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)).
- Hits: 31321