Definition of Public Works
Art. 3244 (1)
“A contract of public works is a contract whereby a person, the contractor, binds himself in favor of an administrative authority to construct, maintain or repair a public work in consideration of a price”.
Unlike concessions, the specific service to be provided is described in contracts of public works. This undertaking on the part of the contractor is either to construct, maintain or repair a public work. Accordingly, when the undertaking is to simply supply materials for the purpose of carrying out a public work, then the contract will not be that of public works. (3244/2/). Generally contracts relating to the construction and development as well as the maintenance and repairing of buildings, housing, bridges, highways, water supply and sewage disposal facilities, dams and other power supply facilities form part of contracts of public works. What makes the contracts that of public works is their widespread affective dimension in the sense that their availability, use and administration involve the public at large.
The history of contracts of public works tells us one thing. That the contracts are made not only to enable the construction, maintenance and repair of the works, but also to generate employment prospects to the unemployed section of the society. This was partly the construction history of United States. It is now part of the contemporary history of Ethiopia.
The locality of J is to have a 31 km all weather road. It accordingly wants to allocate the work to an efficient construction company. In this case the contract to be concluded between J and the competent construction company will be a contract of public works. While J is called the client the company is called the contractor.
Types of Contracts of Public Works
Contracts of public works take different forms. The suitable type is determined based on the nature of the project. The normal type of contract is called measurement contract. Measurement contract goes by other different nomenclatures such as re-measurement contract, build-only contract, unit price contract and the traditional method contract. The other type of contract is the design and build contract. We have also other types of contracts such as management contract, construction management contract, turnkey contract, cost plus fee contract and partnering contract. The predominantly practiced types of contracts are the measurement contracts and the design and build contracts. While measurement contracts are highly practiced in developing countries the design and build contracts are very much practiced in developed countries. The specialization the countries take with this regard is attributable to the nature of each type of contracts. Measurement contracts are far less sophisticated than design and build contracts. Taken with the capacity of contractors in developing countries, authorities resort to measurement contracts which involve their intensive participation on the project. Let us briefly consider the two types of contracts:
Measurement Contract: under this type of contract the design is made by a person provided for this very purpose usually called a consultant engineer. The construction is carried out by another person. Such type of contract presupposes the impossibility of presenting a full-fledged design during the allocation of the work. The name measurement contract by itself implies the fact the work is measurable.
- Design and Build Contract: under this type of contract, the contractor undertakes to make the design and build the work. To this end, the contractor has full obligation to make the design and to build the work. Thus under this type of contract, the obligation is two fold. The degree of obligation is higher under design and build contract. Because of this, the cost of this contract is higher. This does not mean that the owner of the work has no say on the work. Far from it, the contractor must solicit the advice of experts on the work and the interest of the owner of the work on the design. To better express the interest of the owner of the work the same comes up with a conceptual design.
Because of the types of contracts of public works we have, different standards are being devised, drafted and distributed. These new standards try to preserve the contractual balance and distribute responsibility in a delicate way. The prominent standard form contract we have in the world is the Federation International Des Ingeniers Conseils’ (FIDIC) standard. Till now, we have five standard editions of FIDIC. In its kind, FIDIC is a measurement contract.
The FIDIC Contracts Guide is dated 2000 but actually became available mid-2001. It is the official guide to the 3 new FIDIC standard forms of Conditions of Contract dated 1999, viz.:
- Conditions of Contract for Construction (New Red Book)
- Conditions of Contract for Design-Build (New Yellow Book)
- Conditions of Contract for EPC/Turnkey Contracts (Silver Book)
It was decided at an early stage to have just one Guide for all the three New Books, which have been produced as a suite, instead of a separate guide for the individual Books, which was the case for the earlier Red, Yellow and Orange Books. Having one Guide for all three Books enables direct comparison of the differences between the Books, and saves repetition when the wording in the three Books is the same.
As it covers the 3 Books it has been necessary to use abbreviations for the 3 Books. So you will find throughout the Guide the following abbreviations:
- CONS: Conditions of Contract for Construction, which are recommended for building or engineering works where the Employer provides most of the design. However, the works may include some Contractor-designed civil, mechanical, electrical and/or construction works.
- P&DB: Conditions of Contract for Plant and Design-Build, which are recommended for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works. However, the works may include some Employer-designed works.
- EPCT: Conditions of Contract for EPC'/Turnkey Projects, which may be suitable for the provision on a turnkey basis of a process or power plant, factory, infrastructure or other type of project where (i) a high degree of certainty of final price and completion time is required, and (ii) the Contractor takes total responsibility for the design and execution of the project.
Each of the above 3 New Books comprises three sections, viz.:
- General Conditions, which are intended for inclusion unchanged in any contract, and where the clauses hopefully apply to the great majority of contracts of the relevant type;
- Guidance for the Preparation of the Particular Conditions ('GPPC'), which provides some basic guidance on what (if any) provisions may be appropriate for the contract's Particular. Conditions, including some example texts that are not repeated in the Guide;
- forms for Letter of Tender, Contract Agreement and Dispute Adjudication Agreements.
The General Conditions recognize that provisions in tender documents for a particular project may differ from the standard 'General Conditions', and the intention is that changes and added or deleted provisions should be made in the Particular Conditions.
The Guide is therefore intended to provide general guidance and comment concerning the clauses FIDIC has included in these 3 standard forms, where applicable to indicate why any given provision has been included, and what its intention was. The Guide also is intended to indicate circumstances where a provision in the General Conditions should not be used, or should be amended, and it includes guidance and sometimes text of how a provision should be modified.
As we go through the Guide, you will see that it also includes a wealth of other useful information - far beyond simple commentary on the standard clauses - for those involved in procurement of construction projects and in preparing and dealing with contract documentation.
FIDIC contract is build by eight documents arranged in a hierarchical order as
- The contract agreement
- The letter of acceptance
- The tender
- The conditions of Contract Part II(Particular Conditions)
- The conditions of Contract Part I(General Conditions)
- The specifications
- The Drawings, and
- The Priced Bill of Quantities.
If we start at page 4 we see a practical and useful comparison of the main features of the 3 Books.
- Selection of the appropriate Book is critical to the success of a project, and the 'Introduction' on page 5 leads into FIDIC's way of answering the question, "Which Book should be used for my project?" On pages 6-8 are set out a series of questions, the answers to which should indicate which is the appropriate Book to use.
- Pages 9-12 entitled 'Project Procurement' contain a useful commentary on the basic questions of procurement strategy. The commentary indicates the importance of reviewing alternative procurement options before selecting the appropriate strategy for the project in question, and thereafter selecting the appropriate FIDIC Book. It concludes on page 12 with a list of circumstances when FIDIC definitely does not recommend and warns against the use of the EPCT Book (the P&DB Book should normally be used instead).
- Pages 13-16 entitled 'Recommended Procedures' contain a series of charts (taken from the FIDIC publication 'Tendering Procedure' 1994) showing the recommended procedures: for prequalification of tenderers, obtaining tenders, and opening and evaluating tenders. These charts basically apply to tendering for CONS (Red Book) contracts. For P&DB and EPCT contracts the processes are somewhat different as tenderers usually have to submit details of design proposals, which have to be examined and assessed, and the design remains the responsibility of the Contractor.
- Pages 17-20 entitled 'Procurement Documentation' contains an instructive commentary on the documentation required for the prequalification and tendering procedures. It concludes with some good advice about managing the whole tendering procedure.
- Pages 21-40 contain, first, an example form for the 'Letter of Invitation to Tender', then - more importantly - a set of example forms for the complete 'Instructions to Tenderers' for use with each of the 3 New Books. These example forms are intended as a model to assist those preparing the 'Instructions' for any particular contract.
You will realize by now that this Guide is far more than just a commentary to the Clauses in the New Books. It is, in fact, a rather comprehensive 'procurement manual', giving the 'best recommended practice for the procurement of international construction projects'. Peter Booen liked to call it, a 'procurement-learning book', and, indeed, it gives instruction on nearly everything one should learn and know about procurement of such projects.
All of a sudden, at page 41, the commentary on the Sub-clauses of the FIDIC New Books actually begins! As mentioned, it would have been useful if markers or tabs could have indicated the various sections and Clauses, but perhaps one can attach one's own. The text of the 3 Books, followed by the commentary on each Sub-clause, continues all the way to page 317. Thereafter, pages 318-338, follows the text and commentary on the 'Appendix' to the New Books, i.e. the 'General Conditions of Dispute Adjudication Agreement' and its Annex, the 'Procedural Rules'.
We will return to the commentary, but a brief look at two remaining useful sections of this 'monumental' Guide:
- Pages 339-346 contain a glossary of words and phrases used in the fields of construction, consultancy, engineering and associated activities. One or two of the definitions may be slightly controversial, but the list should prove most useful to many in the industry, particularly newcomers and those from countries where English - as spoken in Europe - is not their home language. These definitions are not necessarily those found in the 'Definitions' at the beginning of the New Books.
- Finally, pages 347-353 contain a useful index to where subjects and terms can be found in the Sub-clauses in the 3 Books, in which Book and in which Sub-clause as well as on which page of the Guide.
Duration of Concession
Concessions are contracts of perpetuity. They are perpetual in nature. Still these arrangements are not unlimited by time, thought they cannot limit time.
Under normal course of things, durations are regulated by the contract. Just like any other issue, failure to regulate by the contract will invite in place one legal presumption. The concession will be deemed to have been made for a period of seven years (Art 3227/3/). This is not the end. Failure to renew the concession within two years implies the implicit renewal of the concession for another seven years. The renewal goes on like this for a maximum period not exceeding sixty years.
Termination of Concession Contracts
By now we suppose you very well know the effects of termination of contracts in general. The effect of termination of concession contracts is different from the rest of contracts. This basically arises from the very nature and object of the undertaking. As such concession contracts result in the establishment of an organization to effectively provide public service.
Hence, when the contract is terminated a winding up procedure will be the effect. This winding up in turn will entail the “settlement of accounts between the grantee and the authorities. (Art 3229/1/) The rules of winding up are supposed to be stipulated (3229/2/), short of which the provision of the law to that end will be in place. We have two types of laws applicable in this case. One is the law in the civil code. On the other hand the provisions of the commercial code will also be effective. Termination of concession has different reasons and different consequences as well. Let us first consider some causes of termination under the law.
- 1. Redemption
What is Redemption?
Redemption can be taken to mean improving of something: the act of saving something or somebody from a declined, dilapidated, or corrupted state and restoring it, him, or her to a better condition. Normally a contract for concessions is terminated when the stipulated condition materializes or the fixed time arrives. But redemption is one way of terminating concession contract before the normal time of termination. As the definition given above implies, redemption has its own causes. It is only when the conditions that are mentioned as causes materialize that we resort to redemption. In addition to this, redemption must be resorted to only to meet the rationales of redemption.
Simply speaking, redemption is a decision whereby an administrative authority puts an end to the concession before the expiration of its time. (3236/1/) The grantee should not necessarily commit fault redemption to take place. Rather the condition in which the concession is put necessitates a decision of redemption.
The rationales of redemption might be anything except a motive to “… replace the grantee by another grantee”. Otherwise, redemption may take place at any time with the objective of abolishing all in all or partly (reorganizing) the public service. This is a very good indicator of the prerogative of administrative authorities. However the law does not totally put the law in the hands of administrative authorities. It rather fixes a standard that should be observed before deciding to redeem the service. The effect of redemption is winding up. (3237/1/). On the other hand, redemption will result in the payment of compensation the grantee. The payment made as a result of redemption is called redeeming fee.
- 2. Withdrawal Order
What is envisaged under Art 3228 is a grantee that commits a fault. The rule is the grantee can lose his right only by the order of a court. But if there is an express agreement entrusting this privilege to administrative authorities, then the grantor may order loss of right of the grantee. This order is called withdrawal order. It results in a premature termination of the concession contract. Withdrawal order presupposes the commission of an especially grave fault. This makes the order special from redemption.
We do not know what special fault is. Neither do we know which one is so grave. Courts are those who have the right to determine the nature of the fault and that will decide the loss of right. This being the rule, the law devises a general rule which allows stipulating a clause empowering administrative authorities to order loss of right without going to courts. But can we say that the administrative authorities may order loss of right in a valid way given the volatile nature of the concept of gravity of fault? The final say as to whether an act constitutes a fault or not and as to whether a fault is grave or not should be determined by a court of law.
Just like the above situation, sequestration presupposes, even though not always, an element of fault on the part of the grantee. The degree of fault is not predetermined in the case of sequestration. Art 3238/1/) is quite indicative of this degree. In the case of loss of right the fault required is a special one in gravity. But Art.3241/1/ shows the fault as being default, incompetence or incapacity. What are the effects of sequestration?
Temporary suspension of rights: The concept of sequestration necessarily envisages a possibility of suspension of rights. The suspension of right is only for a limited time. It is temporary owing to the conditions attached on it. Under our law, sequestration is a measure ordered either to abort a possible interruption in the provision of services as a result of the incapacity of the grantee or sequestration is a punitive measure taken against a defaulting grantee. Though the law is not clear as to the how long the sequestration order will last, it is even ambiguous as to whether the order is temporary in the first place when it is made in lieu of punishment. Can the grantee claim repossession as of right? Who shall determine the arrival of the appropriate time for the cessation of the order of sequestration?
Management of the expenses and works of the grantee: The other effect of sequestration is observable in connection with the management of the work. This issue is related with the first effect i.e. loss of right of the grantee. One of the rights that the grantee will lose as a result of order of sequestration is the right to manage the work. The loss of right by itself has its own effects. Although the ultimate effect is expulsion from the management of the work, because this intrinsically necessitates the fact of managing the work by another person, the grantee may have a legal duty to cover the cost of management. The law still has reservations on the matter. The management expenses are to be covered by the grantee only when the sequestration is ordered in lieu of punishment. Otherwise the expenses are going to be covered by the grantor.
Though the above orders can be associated with the prerogative of administrative authorities, Art.3243 on the other hand tries to strike a balance between the prerogative of administrative authorities and the interest of the grantee. It is a good indicative of the fact that measures taken under Articles 3236-3242 should be in accordance with law. Illegality of the measures as ordered by the grantee entails different consequences:
- Cancellation of order: the orders of the grantor are not absolute in the sense that they are amenable to change by a court of law. Although the law says “The court may cancel the sanctions of coercion or dissolution, such as measures of sequestration, state control, loss of right or termination, taken by the administrative authorities against the grantee of a public service”, it is not clear as to when the court orders the cancellation. It is however clear that the order should follow an arbitrary and manipulative decision of an administrative authority. Above all, it should follow an illegal order of the same.
2. Order of compensation: the sanctions imposed on the grantee will definitely cause loss to the same. Taking this into account, it is important to force the administrative authorities to make good what they have made bad by their decision. The authorities are obliged to compensate the grantee only if they have injured the interest of the grantee by their fault. Art.3243 (2) reads as follows:
“It may order the authorities to pay compensation for the damage caused to the grantee in consequence of sanctions applied by such authorities contrary to the law”.[emphasis]
What is concession?
In its legal sense, concession is not clear contract so just like any other contract the requirements of the law of contracts should be met. But what makes concession a special contract is its being an administrative contract. With this, all the peculiarities that we tried to see in the last two chapters are conditioned upon. In concession contracts what would otherwise be done by administrative authorities is done by another person called the grantee.
If so, nonetheless, concession is a special form of administrative contracts. This very nature in turn is regulated by Art 3207(2) of our civil code. It says:
“The concession of a public service is the contract where by a person, the grantee, binds himself in favor of an administrative authority to run a public service getting a remuneration ( there of) by means of fees received on the use there of”. Let us consider the elements one by one:
“Grantee”-One of the contracting parties, a private individual that enters in the activity of providing a public service. As the case may be this person can be a juridical or physical person.
“Grantor”- however will be the administrative authority. It is the administrative authority that undertakes to control the grantee and supervise the work of the same.
Public service-In chapter one, we said public service is one of the issues which necessitates government’s intervention in its provision. It is one of the reasons why we have administrative contracts. As per Art.3207 (1) it is any activity which a public community has decided to perform for the reason that it has deemed it to be necessary in the general interest and considered that private initiative was inadequate for carrying it out…”.The inadequacy of private initiative emanates from different reasons. Lack of infrastructural capital, expert management and exposure to externalities can be mentioned as reasons.
Remuneration-This makes the agreement onerous. It is not for free that the grantee will bind himself in favor of administrative authorities. He must get remuneration in the form of fees. So, users of the service will pay fees and these fees will be remunerations. The basic idea behind concession contracts is not profit. Still one cannot say that the grantee should run the service for free. Unlike other business undertakings the grantee is not as free as ever to set discriminatory prices. The public should equally benefit from the prices set by the parties.
Concession is an administrative contract among other things because one of the parties is an administrative authority-see Art .3132(1) cum Art. 3207. The involvement of administrative authorities however should be regulated. This clearly emanates from the responsibility that administrative authorities have for the good running of the public service.
The role of the administrative authority is supervisory. The grantee has a functional role. For fear of domination, this will result in direct exploitation by the administrative authorities. Art. 3210 (1) says the control should not be excessive. Otherwise, the nature of the concession will be altered.
3.2 Variation clause (3213)
The concession contract may have a stipulation to the effect that adjustments in prices and tariffs will be in place by default. Two issues are important here:
- The variation is conditional on changes occurring in the prices of certain materials, commodities or services. Not all variations in prices matter but only changes in certain materials, commodities or services. There should be a close relationship between the service provided by the grantee and the variable prices in materials, commodities or services. The changes should affect the prices of the public service. Unreasonable price adjustment is not favored here.
XYZ Co. has recently agreed to run a cafeteria in one of the institutions of the Federal Government. Among the services provided, food and drinks take the maximum share. Very recently the grantee is thinking of increasing the price of food in a significant way. When responding to the reasons behind the increment, the grantee mentions the increase in the price of fuel as one of the reasons in addition to the increase observed in the price of sugar. Now the institution in which the service is ran (the grantor) wants to solicit your opinion as to validity or invalidity of the adjustment. Advise it.
2. The new prices should be proportional to the change in the other prices. You may not impose disproportional tariff on users of public service under the guise of variation. In case of disputes, courts are authorized to fix prices. In the above example, one has to consider the magnitude of the increment in addition to the reasons of increment.
3.3. Revision clauses (3214)
Still the parties may agree to the effect that modification may be introduced “where economic circumstances change considerably…” The magnitude of the economic change is very much important in this case than the causes of the change. Because parties are free to agree on and about their terms, the law provides the possibility. How considerable should the economic change be? The determination depends on the specific condition of the time. The underlining element in the determination of the magnitude of the economic change must be the very implication of the change on the provision of the service. We must take considerable change to mean a change which significantly affects the position of the grantee to efficiently carry out the obligations under the contract. Changes in the prices of important raw materials, without which it is impossible to provide the service and the increase of which cannot be reasonably foreseen should entitle the grantee to have revision of the contract. Otherwise, minor economic changes as well as those economic changes that a reasonable business person may foresee must not be grounds of revision.
But Art 3214(1) simply mentions the possibility of revising tariffs without fixing the prices. (Note: do not forget that under Art.3213 (1), in addition to putting the possibility of revising prices, fixation of prices is also achieved). Here, parties therefore should sit down and negotiate the addition of an additional clause in the contract which will possibly be a clause fixing prices. If the parties fail to agree, “the court may fix a tariff” taking in to account the grantee i.e. a tariff ensuring an equitable remuneration to the grantee.(Art 3214/3/). Until now, we have discussed briefly about one from of modification called bilateral (contractual) modification. Now, we will turn to another form of modification called unilateral modification. Concession contracts are arranged to serve the public. They have public policy issue in account. To this end, one of the parties is an administrative authority having a supervisory capacity. For such reasons, administrative authorities have the prerogative of unilaterally modifying the terms of the contract. This prerogative is so valuable that it cannot even be reversed by agreeing to the contrary. (Art. 3216/3/).
By modification, we are referring to making the obligation of the grantee more burdensome. Art.3216/1/) envisages the possibility and also the grounds of doing so. Thus, administrative authorities may impose not only an obligation but even “all the obligations…” that go with the basic undertaking. The imposition of obligations presupposes conditions. Let us see these conditions:
- “… Fit for the proper operation…of the service…”.Because administrative authorities are responsible for the good running of the public service, they should make decisions coincident with such a responsibility. One is taking a course of action via Art. 3216 (1)). For example the grantor may make it an obligation on the grantee that the latter control and regulate unreasonable behavior in the vicinity of the institution where service is provided. To this end the grantee may have the obligation of prohibiting smoking in the institution ran by the grantee. This obligation might be burdensome but still legal.
II. “…fit for the improvement of the service…”- The point is the modification should be inspired by such grand principles a responsible administrative authority should appreciate. Though we cannot talk about the extent in importance of the improvement to the public in general, it is not possible to deny that the improvement should be important to the public and it should not be a ground of abuse.
There are limitations and even prohibitions on this prerogative of unilateral modification. A brief discussion on the limitations and prohibitions will be available here.
1. Only service -related modifications are valid.Art.3217 (1) reads as “Only the clauses concerning the services and its operation may be modified”.
Administrative authorities may increase or reduce the service to be operated. They may also impose an extension of the service. In no case however the authorities may impose modifications which actually change the nature or object of the contract. This is an obvious legal remark serving as a safety measure to maintain concessions as they are. If the nature or object is changed they are no more concession contracts. The organizational change in particular is abhorred by the law. In particular such organizational change as substituting a management under state control for concession is prohibited.
K waterworks is a grantee which has undertaken the duty of providing water to the public with the local water supplies agency herein under called the grantor. Among the duties that the grantee has, providing water to more than ten villages is one. Explicitly, they have also agreed to the effect that the grantee shall undertake the installation of pipes to forty-four thousand households. Very recently however the grantor is thinking of expanding the extent of the service to additional twenty-thousand households. But the grantor is not sure as to the consequences of this decision. What advise can you give to the grantor? Under a similar setting, assume that the grantor is to modify the service provided by the company to include the task of providing consultation to the municipality on issues of advancing and expanding water supply to the community. What is your opinion on the new plan of the grantor?
- The nature of the service and the potential of the grantee-the nature of the service and the potential of the grantee are some the considerations that should be made when the administrative authority thinks of modifying the service. When we say the nature of the service we are referring to the fact that the modification should not result in the imposition of completely new service on the grantee. The introduction of novel services in the scene is not legal. The grantee should not be forced to manage new (novel) service nor he be imposed with an obligation which surpasses his potential. Novel services might even be grounds of surpassing the potentialities of the grantee. As such novel services might be burdens on the grantee because they may come up with a special arrangement for their performance. Though possible to say that novel services are recognizable easily, it is possible to hold that the grantor may impose a new service on the grantee under the guise of extension. Even though courts will have a final say on the matter, it is still possible to outlaw such disguised extensions by resorting to the second option i.e. that the services surpass the potentials of the grantee. A service may surpass the potentials of the grantee in different ways. A service may be beyond the capacity of the grantee financially. In this case we say the service cannot be provided by the grantee given its financial capacity. At other times, the grantee may not have the required expertise to carry out the service. This independent treatment of the ways should not give the image that they are not related. For example, lack of financial capacity may be a ground not to have the required expertise from the market.
3. Financial interest of the grantee- financial benefits that accrue to the grantee as per the concession may not be modified unilaterally by the authorities. On issues involving the interest of the grantee the grantor is not as such free to fix the remuneration unilaterally. In our previous example, would it be against the interest of the grantee if the grantor modifies the contract to the effect that the grantee will provide consultation services to sub-contractors engaged in the construction of water works? Why? Why not?
Cancellation denotes the situation where parties declare the cessation of obligations prematurely. This is done for different reasons. Among other things, parties resort to cancellation when one or both of the parties fail to do what otherwise they ought to do, do what they ought not to do or when one fails to deliver what he/she has to deliver for different reasons.
What can be taken as one other effect of non- performance is cancellation of the contract. Legally we have an out sourced and a self sponsored cancellation depending on circumstances. Thus cancellation may be a self- help measure when parties have previously agreed about it in their contract, where one of the parties has failed to perform his obligation within the time fixed as per Articles 1770, 1774 and 1775 or where performance by one of the parties is hindered or has become impossible. This last condition is independent of the first two because cancellation is demanded before the obligation has become due. Thus, Article 1788 holds “A party may cancel the contract even before the obligation of the other party is due where the performance by the other party of his obligations has become impossible or is hindered so that the essence of the contract is affected”.
These above conditions authorize parties to unilaterally cancel their contracts. Unilateral cancellation should not imply cancellation solely undertaken by the party resorting to it. Far from this, there are conditions that call for the intervention of courts.
Art 1789 envisages still another probability warranting a self-sponsored cancellation of contracts.
But this self-help measure is available so far as the conditions mentioned above are fulfilled. Short of that, cancellation should be effected only upon the authorization the court. (Art.1784).
This still is not tantamount to that courts will not intervene under cases mentioned earlier before and coming under Articles 1786, 1787, 1788 & 1789. Rather, the specific instances envisaged may require the authoritative determination of courts.
The position of the law under general contracts being this, what does it say concerning administrative contracts? Basically the special rules that deal with administrative contracts do not say anything on this matter. This however may not force us to conclude that parties under administrative contracts do not have this remedy at their disposal. Far from that Art.1676 is indicative of the possibility of applying those rules on cancellation in case of administrative contracts.
In association with this discussion none the less it is worth commenting on Art.3180 which talks about “termination of contract.” We underline the worth of this because the concept under Art. 3180 is susceptible to the following proliferated interpretations:
- Taking Art. 3180 as a cancellation proviso and specially a unilateral cancellation proviso
- Taking Art.3180 as a termination proviso at face value
- Taking Art. 3180 as an invalidation clause specially when considering the Amharic version of this same Article.
A Synopsis of Invalidation, Cancellation and Termination: A cautious approach to Article 3180.
As you might have understood you clearly know by now, these three concepts are quite different concepts but they similarly signify the termination of a contractual relationship (Art 1807).
Focusing on the differences we see that cancellation implies normally and validly formed contract while termination implies the formation of another contract (note: please consider Arts. 1675 and 1819 again) in the first place. In the case of termination, we have a contract created an obligation and still a grand contract that has extinguished a contract thus ending up by having two 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 and, 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 lies in 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 their ground is the only difference. They are also different in their effect. Even though 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. Even though 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.
According to 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 spirit of the provisions, contracts whose object is not sufficiently defined, impossible and which do not in a prescribed form seem 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 as 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 give one of the parties the power either to invalidate the contract or give it effect. Therefore since the grounds provided under Articles 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. Even though 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 the picture 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 contracting parties. 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 alboslutely impossible 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 even though it is not invalidated. Notwithstanding the fact that a contract is invalid, the reaction of contracting parties to a contract is not necessarily invalidation. Contracting parties 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 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.
Invalidation, on the other hand, implies a contract that is not validly formed in the first place. Depending on cases such a contract might be void or voidable contract. Hence, lack of consent, capacity, form when required) or lack of a legal or moral object among other things may cause the invalidation of the contract. Semantically Art.3180 is about termination and still about invalidation (for the latter case it is wise to refer the Amharic Version).
But what are the real causes that set Art.3180 in motion? Let us consider the full text first:
“The administrative authorities may terminate the contract notwithstanding that the other party has committed no fault where the contract has become useless to the public service or unsuitable for its requirements”.
The existence of two independent conditions justifies the decision of an administrative authority to “terminate” a contract. One the contract should prove to be” useless to the public service” or the contract should “become unsuitable for its requirements.”
Do these remind you of Art.3170 which deals with lack of cause (object) on the part of contracts? Can you now read Art.3170 with Art.3180 and ultimately with our previous discussion on invalidation thereby referring to Art.3180 (2).