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Law of Contract I

Teaching Material

Developed By:

1) Mesganaw Kifelew

2) Demelash Shiferaw

Sponsored by the Justice and Legal System Research Institute

2009

• Chapter One: Obligations in General ……………………………………………………...…. Table of Contents
• 1.1. Introduction………………………………………………………………………………....
• 1.2. The Concept of Obligation…………………………………………………………………..
• 1.3. Definition of Obligations……………………………………………………………………
• 1.4.Sources of Obligations……………………………………………………………………….
• 1.5. Types of Obligations………………………………………………………………………...
• 1.6. The Meaning of Contract/Contract Law…………………………………………………….
• 1.7. The Purpose and Scope of Contract Law…………………………………………………… - 1.7.1. Purpose of Contract Law…………………………………………………………... - 1.7.2. Scope of Contract Law……………………………………………………………..
• 1.8. Historical Development of Contract Law...…………………………………………………
• 1.9. The Economic Analysis of Contract Law…………………………………………………...
• Chapter Two: Formation of Contracts ……………………………...………………………...
• Introduction……………………………………………………………………………………...
• 2.1. Capacity………………………………………………………………………………..........
• 2.2. Consent……………………………………………………………………………………... - 2.2.1. Communication of Consent………………………………………………………… - 2.2.2. Acceptance………………………………………………………………………….. - 2.2.3. Defect in Consent……………………………………………………………………
• 2.3. Object of Contracts…………………………………………………………………………. - 2.3.1. Object Defined……………………………………………………………………… - 2.3.2. Freedom of Contract………………………………………………………………...
• 2.4. Form of Contract……………………………………………………………………………. - 2.4.1. Definition…………………………………………………………………………… - 2.4.2. Freedom of Form…………………………………………………………………… - 2.4.3. Contracts made in Written Form…………………………………………………… - 2.4.4. Effects of Form…………………………………………………………………….. - 2.4.5. Written Form………………………………………………………………………..
  • 2.4.6. Other Special Forms…………………………………………………………………
• 2.5. Effects of Elements of Contracts…………………………………………………………...
  • 2.5.1. Difference between Void and Voidable Contracts………………………………… ii
  • 2.5.2. Similarities between Void and Voidable Contracts…………………………………
• Chapter Three: Effect of Contracts ………………………………………………...…………
• 3.1. What does Effect of Contract Mean…………………………………………………………
• 3.2. Interpretation of Contract……………………………………………………………………
  • 3.2.1. Searching Intention of Parties……………………………………………………….
  • 3.2.2. Interpretation in Favor of Debtor…………………………………………………..
• 3.3. Performance of Contracts………………………………………………………………….
  • 3.3.1. Who Performs Contracts…………………………………………………………..
  • 3.3.2. Who may Receive Payment………………………………………………………..
  • 3.3.3. What to Perform……………………………………………………………………
  • 3.3.4. Appropriation of Payment………………………………………………………….
  • 3.3.5. Place of Performance………………………………………………………………
  • 3.3.6. Time of Performance………………………………………………………………
  • 3.3.7. Transfer of Risk……………………………………………………………………
  • 3.3.8. Cost of Payment……………………………………………………………………
  • 3.3.9. Debtors’ Right to Receipt………………………………………………………….
• 3.4. Variations of Contracts……………………………………………………………………. - 3.4.1. Introduction……………………………………………………………………… - 3.4.2. Judicial Variation of Contract……………………………………………………
• Chapter Four: Non-Performance of Contract and Its Remedies …………………………..
• 4.1. Introduction………………………………………………………………………………...
• 4.2. Meaning and General Remedies of Non-Performance…………………………………….
• 4.3. General Remedies of Non-Performance under Ethiopian Law…………………………… - 4.3.1. The Pre-Requisites for Invoking the Remedies of Non-Performance…………... - 4.3.2. Enforcement of Contracts……………………………………………………….. - 4.3.3. Cancellation……………………………………………………………………... - 4.3.4. Damages (Compensation)………………………………………………………..
• References………………………………………………………………………………………

CHAPTER ONE

OBLIGATIONS IN GENERAL

1.1 Introduction

This chapter is intended to introduce the students to the basic notions of obligations and contracts that are crucial to understand the chapters that follow. Here, the chapter will discuss the concept of obligations, the sources of obligations, types of obligations, the meaning of contracts, the historical development of contracts and contract law, as well as brief discussion on economic analysis of contract law.

1.2 The concept of obligation

The conceptual foundation of obligation traces as far back to ancient Roman law which defines obligation as a means of an undertaking or legally binding relationships where one party promises the other party to perform some acts or to do something. Ancient well-known Roman lawyers defined obligations based on their personal opinion, which as a result has develop the concept of obligation.

Year Gay, a Roman jurist, defines obligation as „a means of personal claim brought against another in order to force him before us to give us so as to we are able to enforce our rights. Gay also classifies obligation in terms of contract, quasi-contract, delict, and quasi-delcit

Pavel year also understood obligation as an undertaking not by Roman citizens to perform some acts or to do or to give or to render rights to non-roman citizens regarding to give, to do, or to render some rights to roman citizens.

The concept of obligation by both classical legal scholars was unilateral in character and discriminatory in nature since it imposes obligation to do, to give or to render rights only on non-roman citizens not the Romans.

Likewise the Ethiopian civil code, in the book IV of the code uses the term obligations with out defining what it means. However, like French judges who define obligations indirectly from article 1101 of the French civil code of the term contract as an agreement whereby two or more persons as between themselves create, vary or extinguish obligations of proprietary nature.

1.4 Sources of obligations

According to Gay, Roman jurist, the fundamental source of obligation can be classified into two: a) Contract b) Beyond the contract

Those obligations, which arises beyond the contract, are divided into unjust enrichment (quasi-contract), unlawful acts (delict) and causing physical injure to the person or causing damage to property of person (quasi-delict ).

In modern time, the laws of different countries clearly express the sources of obligation. For instance, French civil code classifies the source of obligation as; i) Obligation that arises from contract ii) Obligations that arise beyond the contract iii) Obligation that arises from the unlawful acts iv) Obligations that arises from the causing of physical injure or causing material damage vi) Obligations arising from law

In Ethiopian legal system, there are no clearly stated classifications of sources of obligations. But Art.1675 of Ethiopian civil code generally expresses obligations as arising from contractual agreements.

However, the close readings of the provisions of the civil code show that there are other sources of obligations-like those arising from non-contractual relationships (from Art.2027-2178), obligations arising from unlawful acts or obligation that arises from the causing of physical injure or obligation arising from the causing of material damage (fromArt.2027-2161) and finally, obligations arising from unjust enrichment (from Art.2162-2178).

In so far as an obligation arising from the law is concerned, it happens in situations when law imposes obligations on persons to give or not to give, to do or not to do some acts recognized in almost all-legal systems.

Obligation arising from the law is a unilateral obligation imposed on citizens or contracting parties without their consent. It includes among other things  Obligation to pay income taxes  Obligation to render military services  Obligations of creditors  Obligation of debtors  Obligations of families to their children, etc.

1.5 Types of Obligations

Obligations can be classified based on the nature of activities, and the number of parties legally bound by the obligation. Accordingly, they can be classified into:

1) Divisible obligation

This is one whereby a party undertakes to perform its obligations by dividing into parties. For instance, if A and B owed C 1,000 BIRR such parties to the obligation perform or discharge the obligations by paying half (part) of the debt to C, which is 500 each.

2. Joint obligations
3. Several and joint obligations

1) Simple joint obligation. In this type‟s obligation, parties who are bound by such obligation are not jointly liable for the total debts, but each debtor is liable for its own share with the exception of Art.1917 of the Ethiopian civil code

2) Joint obligations It arises from the contractual obligation in which more than two parties participate and debtors are jointly liable for the debt secured as a result of the obligation entered into with the creditor or creditors.

3) Several and joint obligations. In this kinds obligations the co-debtors shall be jointly and severally liable unlike joint obligation where the debtors are jointly obliged to under take a given obligation, in the several and joint obligation, the creditor may require all the debtors or one of them to discharge the obligation in whole or in part.

1.6 The meaning of contract/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.

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.

1.7.2 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 stipulate 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)).

1.8 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 foundation 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 destines. 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 every one 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 with out questions

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 maximizers 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 every one 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.

Non-Binding Agreements Mere domestic or social agreements are not usually intended to be binding and, therefore, are not contracts. E.g. A father told his son that he (father) will reward 10,000 Birr if the son scores 4.00 points in his first semester exam.

A binding contract is usually in the nature of a commercial bargain, involving some exchange of goods or service for a price. In considering whether sufficient intention to create a binding contract is present; two situations are possible:

a. Where the parties expressed by denying the intention (for commercial agreemen t). e.g. A written commercial agreements described itself merely as an “honorable pledge and stated expressly that it was not “to be subject to the jurisdiction of any court. b. Where the parties do not expressly deny intention to create legal relation. It is in each case a question of construction for court to decide as to whether a contract is intended.

Thus, in commercial agreements, there is a refutable presumption that a contract is intended but in social or domestic or family agreements there is a refutable presumption that no contract is intended. (But note that in each case the presumption is refutable by evidence to the contrary.)

Eg 1. C. Persuaded her sister, p to sell her own house and come and live in C‟s on condition that C would give her house to P by donation. After sometime C injected P from the house and refused to honor the donation. P claimed damage for breach of donation contract. Is P correct?

Eg 2 B and O habitually ride in each others cars. While in O‟s car, B was injured due to O‟s negligence and sued for damage under Ethiopian law of carriage. B claims that

there was contract of carriage between him and O since he (B) contributed to the petroleum cost. Is “B” Correct? Eg 3. Hawassa University and SNNPR Supreme Court entered into the following agreement.

Memorandum of Understanding This memorandum of understanding is signed on this day of 25th^ February between Hawassa University & SNNPR Supreme Court. By this agreement;

1. The Court agrees to make internet service available for the Law Faculty students of the university.
2. The University agrees to make conference rooms available to any need of the court.
3. The university agrees to give free library and internet service to any judge of the court.

So, what is the student asker?

Generally, the mere existence of agreement to be bound by defined obligation does not necessary make Contract. It is necessary to identify whether the parties intended only moral obligation or legal obligation, if parties agree to be bound morally only, the agreement is not a contract since it cannot be enforced by state backing. For a contract to exist parties must agree that any violation of the obligation would be punished by using state machinery. Therefore; the phrase “… agrees to be bound thereby …” in Art. 1679 implies the parties‟ intention to take any controversies in relation to obligation to court thereby allowing the court to interfere in their relation.

Meeting of Mind (Art.1680) Contract occurs when the minds of the offeror and offeree meet upon common object of the contract. This meeting of mind is called consensus ad idem i.e. consent to the matter. The declaration of both parties must relate to the same matter. This is what Art 1680(1)