BL Law of Contracts

Extracted Material on Business Law
Business Law AAU, College of Business and Economics
PART - FOUR
LAW OF CONTRACT
1. Background
Goods are bought, sold, and moved by way of contract; employees are hired under contract;
land and buildings are developed, bought, sold, financed or leased under contract; business
risk is reduced by the contract of insurance; and, indeed, many businesses, such as
partnerships, are based on contracts. In a sense, contracts represent the foundation of most
commercial activities, and consequently, contract law represents one of the most important
areas of business law. In this part the formation of a valid contract is explained. A contract
can be described as an agreement concluded by two or more persons with the serious
intention of creating legally enforceable obligations. Law of Contract is an area of the law
that relates almost exclusively to business transactions. Contract law differs from many other
areas of the law in that the parties need only follow the principles set out in the law to
create their own rights and duties that the courts will then enforce. In some respects, the
parties create their own “law” that they are obliged to follow. This is governed by the
doctrine of “Privity’. In principle a person cannot contract with himself or herself unless he or
she acts in a different capacity on each side of the contract. For instance Mr. Malcolm is a
General Manager for some company called ABC. The company desires to rent the house owned
by Mr. Malcolm for office purpose. Then, Mr. Malcolm can sign a contract as a Lessor
representing himself and as a Lessee representing the company. In such a fact therefore Mr.
Malcolm may contract with himself.
The privity of contract doctrine dictates that only persons who are parties to a contract are
entitled to take action to enforce it. A person who stands to gain a benefit from the contract
(a third party beneficiary) is not entitled to take any enforcement action if he or she is
denied the promised benefit. An obligation is the legal relationship that exist between parties
to an agreement when they acquire personal rights against each other that either entitle
them to performance and/or oblige them to perform. Performance may entail an obligation
to do or not to do something, or to deliver something. Personal rights may come about
through various events, for instance through delict or contract. Thus, the conclusion of
contract is an event giving rise to obligations. Although a contract is an agreement between
two or more parties, not all agreements are contracts and not all agreement create
obligation. For example, social appointments (such an agreement between friends to meet at
a restaurant on a specified date and time) are agreements but they are not contracts as they
do not create legally enforceable obligations. At most they create only moral duties. The
difference between a contract and an agreement lies in the intention of the parties and in
the different consequences that are attached to their agreement. 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;
Unilateral and Bilateral Contracts
The exchange of mutual, reciprocal promises between entities that entails the performance
of an act, or forbearance from the performance of an act, with respect to each party, is a
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Bilateral Contract. A bilateral contract is sometimes called a two-sided contract because of

the two promises that constitute it. The promise that one party makes constitutes sufficient
consideration (see discussion below) for the promise made by the other. A unilateral contract
involves a promise that is made by only one party.This is a one-sided type of contract because
only the offeror, who makes the promise,
̣ will be legally bound. The offeree may act as
requested, or may refrain from acting, but may not be sued for failing to perform, or even for
abandoning performance once it has begun, because he or she did not make any promises.
Contracts under Ethiopian Law
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’’.
Taking contract as a means constituting a valid obligation among contracting parties, it will
have an automatic effect to get established, (formed) , varied (made deviation or change on
the duties where contracting parties entered into) as well as it will get extinguished or
terminated.
Formation of a Contract
A contract is an agreement giving rise to obligations which are enforced or recognized by law.
The law prescribes certain requirements that must be met for a contract to be valid and
legally enforceable. Article 1678 of the Civil Code laid down four basic essentials to the
creation of a contract:
i. Capacity
ii. Consent (Consensus) or contractual intention;
iii. Object and;
iv. Form (Formalities)
The first requisite of a contract is that the parties should have reached agreement. Generally
speaking, an agreement is reached when one party makes an offer, which is accepted by
another party. All contract involve the element of capacity, consent (Consensus) or
contractual intention and object i.e. contract cannot be imagined without capacity, consent,
and object. However form is required for few contracts only.
i. Capacity to Contract
Capacity to contract is one of the important essential requirements for a valid contract. An
agreement becomes a contract if it is entered into between the parties who are competent to
contract. Every person is competent to contract who is or the age of majority according to
the law to which he is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject. Although human beings are subject to rights
and duties from the moment of birth, to death some may not be entitled to exercise such
rights and duties. Still others may exercise only some of their rights. Minors and judicially
interdicted persons cannot enter into a contract. However; when a legally interdicted person
enters into a contract which he was prohibited from such is not limited to incapacity but also
extends to illegality as per Art 1716. The same holds true for special incapacities indicated
under Art. 194. Rights are held by every person from the moment of birth, and these rights,
according to Article 1 of the civil code, are enjoyed by everyone regardless of race, colour,
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religion or gender. But the direct exercise of certain juridical acts (such as legally binding
contracts) requires a certain level of maturity, mental condition and the like. The law duly
lessens such rights of certain groups of persons on the basis of their status of minority,
notorious insanity, apparent infirmity, judicial interdiction and legal interdiction for the
following reasons:
a) To protect incapacitated persons from others who may take advantage of their
inexperience, inferior judgment, etc.; and to protect these persons of lessened
capacity from their own erroneous decisions and acts that could be detrimental to
their interests.
b) In the case of legal interdiction, the incapacity has the purpose of protecting society
from offenders.
a. Minority:- Every person’s ability to form a declare a will, as well as the ability to
appreciate the consequence of the contract, is determined by his or her level of intellectual
and emotional development which in return be determined by his or her age. Such period is
referred by the law as period of minority. A minor is a natural person whose age is below
eighteen. A minor is a person of either sex, who is below eighteen years of age (Art. 215 –
Revised Family Code), and minority starts from the beginning of physical personality. A minor
cannot perform juridical acts (i.e.-acts that entail legal consequences) “except in cases
provided by law” (216/3- RFC). The words “except in cases provided by law” indicate that
there are certain juridical acts that minors are allowed to perform.
b. Mental Deficiency: - According to Article 339/1, an insane person is one who cannot
understand the importance of his actions as a result of being insufficiently developed (i.e.-
retarded development, mental disease or senility). The two cumulative elements in the
definition of insanity pertain primarily to the mental condition of the person, and secondly to
his inability to understand the importance of his actions. In appropriate cases, persons who
are feeble-minded, alcoholics, persons who are habitually intoxicated and prodigals shall be
entitled to the protection given to insane persons (339/2). An interpretation a fortiori seems
to enable us consider that habitual intoxication can accommodate drug addicts although they
are not expressly included owing to the non-existence of the problem as an issue of public
concern when the Civil Code was enacted in 1960. Juridical acts performed by an insane
person are not invalidated on mere grounds of insanity unless the insanity is notorious (347/1,
341, 342). Yet, the insane person can invoke defects in consent (1696-1710) on account of his
insanity (347/2). This remedy can be invoked only by the insane person himself and not by his
heirs or his creditors (348). There are two exceptions (Art. 349) where heirs or creditors may
invoke defects in consent on account of insanity, namely:
a) where the terms of the contract clearly reveal insanity (349/1), or,
b) where the judicial interdiction of the person has been demanded.
The English version of Article 349/1 is not as clear as the official Amharic version that reads
“... የውል አድራጊው የአእምሮ ጉድለት ከተደረገው የውል ቃል የሚታወቅ እንደሆነ (በቁጥር 348) የተደነገገው ደንብ
ተፈፃሚ አይሆንም”.
Notorious insanity and apparent infirmity:- Legal protection is given to a person whose
insanity is notorious (publicly known) or whose infirmity is evident (343}. A person is
notoriously insane where he is an inmate of a hospital or an institution for insane persons or
nursing home by reason of his mental condition (339) for the period for which he remains an
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inmate. The three cumulative of the definition are being an inmate, the mental condition of
the person and the duration of the legal protection. In the case of rural communities of less
than two thousand inhabitants the insanity of a person shall be deemed notorious, where his
family or those with whom he lives watch over him and restrict his liberty of movement due
to his mental condition (342). The figure two thousand is merely meant to indicate
communities where the inhabitants have a relatively closer relationship that enables them to
know the mental condition of an insane person (346/2) who lives in their commune or in an
adjacent commune. However, the Amharic version of Article 342 reads “…ከሁለት ሺህ የማያንስ ..
(i.e.- in rural communities of not less than two thousand inhabitants)”. This is obviously a
mistranslation, because unlike the English version it requires two thousand or more
inhabitants.
c. Judicial Interdiction: - Notorious insanity only lasts for the period during which the person
is an inmate of a hospital, an institution for insane persons or a nursing home by reason of his
mental condition. And, the issue whether an infirmity is apparent is at times controversial.
The best means of securing adequate and sustained legal protection for insane and infirm
persons is thus through judicial interdiction i.e. the withdrawal of the capacity to perform
juridical acts in order to protect the interest of the interdicted person and his presumptive
heirs.
d. Legal Interdiction: - Unlike the other varieties of general incapacity, the rationale behind
legal interdiction is not to protect the incapacitated individual, but instead, to protect
society from the legally interdicted person. According to Article 380 “a person interdicted by
law is one from whom the law withdraws the administration of his property as a consequence
of a criminal sentence." Pursuant to the same provision legal interdiction is determined by
penal laws. Article 123 (c) of the 2004 Criminal Code inter alia (among other things) deprives
an unworthy offender of “his rights to exercise a profession, art, trade or to carry on any
industry or commerce.” The rules governing judicial interdiction apply in cases of legal
interdiction (381). The acts that the interdicted person is not entitled to perform are subject
to invalidation upon request by the interdicted person, the person who has contracted with
the legally interdicted person, or by the public prosecutor (387/2).
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ii. Consent (Consensus) : -

Consent or true agreement is the basis of every contract. Apart from other requirement that
must be satisfied to form valid and enforceable contract, parties should reach into consensus
on the rights and duties created by their agreement. In order to decide whether a contract
exists, one looks first for consensus between the parties, which implies a subjective inquiry.
However, as consensus can mostly be revealed only by external manifestations (for example,
the physical document which contains the contract), the inquiry as to whether consensus has
been reached is generally also objective in nature. Consent is a declaration of intention to be
bound by an obligation. A person has to express his willingness to create an obligation on
himself, or give up some or all of his proprietary rights. In modern times individuals have
relative freedom to decide on their own rights especially property rights without the
interference of a state or another person. Consensus can be reached only if:
(a) Every one of the parties has the serious intention to be contractually bound,
(b) The parties have a common intention, in other words they must have in mind the
same commitment, and
(c) Every party makes his or her intention known to every other party by means of a
declaration of intention.
The intention to be contractually bound
There must be the consensus between the parties. The parties must agree on the objectives
of the contract. This is also referred to as ‘true agreement’ or ‘the meetings of minds’. This
means that each party to the contract must have the serious intention to create right and
duties to which each of them will be legally bound, that the parties must have a
corresponding intention, and that the parties must make their intention known to one
another. So in a contract, a person should know the obligation he is going to carry out and the
benefit he is going to get / or lose. Knowledge is not enough, he should also agree to such
obligation/ benefit. Agreement is not still enough. The person should also agree that if he
fails to meet his obligation as agreed the state machinery may be used to force him to carry
out his obligation. That is what is provided under art 1679. The parties have to know means
they have to define their obligations (undertakings). Moreover they have to agree to be
bound. Therefore; contract cannot be imagined without consent of the parties i.e. contract is
dependent on the consent of the parties. The Civil Code of Ethiopia provided the provisions
deals with Consent under Articles (Art.1679-1710)
Common intention of the Parties

The parties must also agree on the contractual obligations or commitments they wish to
create. They must, therefore, have a common intention to contract with each other and must
intend to create the same legal relationship.
Making the intention known
Consensus can only be present if the parties are mutually aware of one another’s intention. In
other words, all the parties must be aware of their true agreement. The mere existence of
two independent but corresponding intentions cannot create a contract. For instance if X
wants to sell his watch to Y for Birr 50 and Y, completely unaware of X’s intention, decides of
offer Y 50Birr for the watch, consensus will not exist until X and Y become aware of one
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another’s intention. There are many ways in which a contracting party’s intention can be
made known. It can be done in writing, orally or by means of conduct. The most common way
to look for an offer and the acceptance of it.
Communication of Consent (Art. 1681)

Consent is expressed either in the form of offer or acceptance Offer and acceptance are ways
of communicating one’s own intention to be bound by an obligation. Therefore; offer or
acceptance is declared to another person by ordinary ways of communication .These ways of
communication are oral, written, signal and conduct. The reaching of consensus requires to
that every party must declare his or her intention to create enforceable rights and duties.
The usual way in which parties make their intention known to one another is through offer
and acceptance. An offer is a declaration made by a person (the offeror) in which he or she
indicates an intention to be contractually bound by the mere acceptance of the offer, and in
which the person set out the right and duties he or she wishes to create. The offeror invites
another party or parties (offeree/s) known to consent to the creation of obligation(s)
between the offeror(s) and the offeree(s). An acceptance is a declaration by the offeree (the
person to whom the offer was made) through which it is indicated that he or she agrees to the
terms of the offer exactly as put in the offer.
Offer and Acceptance Classically, we commence our analysis by identifying a discrete offer
and then searching for a matching acceptance, which together evidence an agreement having
been concluded. Perhaps the most important feature of a contract is that one party makes an
offer for a bargain that another accepts. This can be called a 'concurrence of wills' or a
'meeting of the minds' of two or more parties. There must be evidence that the parties had
each from an objective perspective engaged in conduct manifesting their assent, and a
contract will be formed when the parties have met such a requirement. An objective
perspective means that it is only necessary that somebody gives the impression of offering or
accepting contractual terms in the eyes of a reasonable person, not that they actually did
want to contract. Offer is laying down contents of would be contract i.e. indicating the
respective obligation of each would be parties to the contract and informing the same to
them with the expectation of response from them. Moreover, offer contains the intention of
the person making it to be bound by the content of the offer. In short offer contains three
important elements, the content of the contract, the agreement of an offeror to be bound
and request of the offeror to the offeree to be bound by the offer. The person making the
offer is called offeror. The offeror has autonomy to choose any of the four ways of
communication (Oral, written, signal and conduct). He /she may even choose the ways.
Requirement for Offer and Acceptance: - Offer and acceptance does not always need to be
expressed orally or in writing. An implied contract is one in which some of the terms are not
expressed in words. This can take two forms. A contract which is implied in fact is one in
which the circumstances imply that parties have reached an agreement even though they
have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees
that he will pay a fair price for the service. If he refuses to pay after being examined, he has
breached a contract implied in fact. A contract which is implied in law is also called a quasi-
contract, because it is not in fact a contract; rather, it is a means for the courts to remedy
situations in which one party would be unjustly enriched were he or she not required to
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compensate the other. For example, say a plumber who accidentally installs a sprinkler
system in the lawn of the wrong house. The owner of the house had learned the previous day
that his neighbor was getting new sprinklers. That morning, he sees the plumber installing
them in his own lawn. Pleased at the mistake, he says nothing, and then refuses to pay when
the plumber hands him the bill. Will the man be held liable for payment? Yes, if it could be
proven that the man knew that the sprinklers were being installed mistakenly, the court
would make him pay because of a quasi-contract. If that knowledge could not be proven, he
would not be liable. An offer and acceptance will give rise to the formation of a valid
contract only if the following requirements are met:
a. An offer is an expression of willingness to contract on specified terms, made with the
intention that it is to be binding once accepted by the person to whom it is addressed.
The offer should be made with the intention that the offeror will be legally bound by the
mere acceptance thereof by the offeree. An offer must be distinguished from an invitation
to treat, by which a person does not make an offer but invites another party to do so.
Whether a statement is an offer or an invitation to treat depends primarily on the
intention with which it is made. An invitation to treat is not made with the intention that
it is to be binding as soon as the person to whom it is addressed communicates his assent
to its terms. Common examples of. The offer must be complete. It must contain all terms
by which the offeror is willing to abide, as well as all the terms to which he or she wants
to bind the offeree.
b. The offer and the acceptance must be clear and certain. The intended obligation should
be stated unequivocally and unconditionally so that the rights and duties intended by the
offeror are determined or ascertainable.
c. The offer and acceptance should be communicated. Normally the offer and an acceptance
should either made expressly (in writing or orally) or tacitly by means of conduct (for
example by a nod of the head, a movement of the hand or the handling over money).
There must be an objective manifestation of intent by the offeror to be bound by the
offer if accepted by the other party. Therefore, the offeror will be bound if his words or
conduct are such as to induce a reasonable third party observer to believe that he intends
to be bound, even if in fact he has no such intention.
d. The offer must be addressed either to a particular persons or the general public. An offer
can be addressed to a single person, to a specified group of persons, or to the world at
large. An example of the latter would be a reward poster for the return of a lost pet.
Failing Away of an Offer
The offer on its own without an acceptance cannot give rise to a contractual obligation. Once
an offer has been made, it does not remain open for acceptance indefinitely, but lapses:
a. If the offer stipulates that it is valid only for a certain period of time, the offer falls
away if it has not been accepted within that period.
b. If, before the offer accepted, the offeror informs the offeree that he revokes the
offer, the offer is extinguish.
c. If the offeree revokes the offer, the offer falls away and cannot be revived.
d. If either the offeree or the offeror dies before the offer is accepted,
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Acceptance
It is the second important essential elements for a valid contract. When the person to whom
the offer is made signifies his assent thereto, the proposal is said to be accepted. A proposal,
when accepted, becomes a promise. An offer to sell his house to B for Rs.500, 000. B accepts
the offer to purchase the house for Birr 500, 000. This is an acceptance. An acceptance is a
final and unqualified expression of assent to the terms of an offer. Again, there must be an
objective manifestation, by the recipient of the offer, of an intention to be bound by its
terms. An offer must be accepted in accordance with its precise terms if it is to form an
agreement. It must exactly match the offer and ALL terms must be accepted. An offer may be
accepted by conduct (for example, an offer to buy goods can be accepted by sending them to
the offeror). Acceptance has no legal effect until it is communicated to the offeror (because
it could cause hardship to the offeror to be bound without knowing that his offer had been
accepted). The general rule is that a postal acceptance takes effect when the letter of
acceptance is posted (even if the letter may be lost, delayed or destroyed). However, the
postal rule will not apply if it is excluded by the express terms of the offer. An offer which
requires acceptance to be communicated in a specified way can generally be accepted only in
that way. If acceptance occurs via an instantaneous medium such as email, it will take effect
at the time and place of receipt. Note that an offeror cannot stipulate that the offeree's
silence amounts to acceptance. A communication fails to take effect as an acceptance where
it attempts to vary the terms of an offer. In such cases it is a counter-offer, which the
original offeror can either accept or reject. For example, where the offeror offers to trade on
its standard terms and the offeree purports to accept, but on its own standard terms, that
represents a counter-offer. Making a counteroffer amounts to a rejection of the original offer
which cannot subsequently be restored or accepted (unless the parties agree).It is important
to distinguish a counter-offer from a mere request for further information regarding the
original offer. An offer may be revoked at any time before its acceptance, however the
revocation must be communicated to the offeree. Although revocation is ineffective.
Essentials of a Valid Acceptance: - It must be given by the Offeree- An offer can be
accepted only by person to whom it is made. It cannot be accepted by another person with
the consent of offeror. Similarly in case of offer to the particular class it can be accepted by
any member of that class. A sold his business to B without disclosing the fact to his
customers. J send is an order for the supply of good to A by name. B receives the order and
executed the same. It was held that there was no contract between B and J because J never
made any offer to B.
It must be absolute and Unconditional: - In order to convert the offer into an agreement,
the acceptance must be an absolute and unconditional. If the offeree imposes any condition
in his acceptance, it is not a valid acceptance, but a counter offer. A offer to sell his watch to
B for Rs.200 and B replies that he can buy it only for Rs. 100, there is a material variation in
the acceptance. Therefore, there is no agreement as the acceptance is not absolute and
unconditional. M offer to sell his piece of land to N for Birr 12, 000, 000, N accepted and
enclosed Birr 800, 000 with the promise to pay the balance by the monthly installments. Held
there was no contract between N & M, and the acceptance was unmodified. It must be in
Prescribed Manner. If the offeror in his offer has prescribed any particular manner of
acceptance, it must be given according to that particular manner.
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It must be communicated to the Offeror. In order to form a contract the acceptance must
be communicated to the offeror in a clear manner by the offeree or his authorize agent. Here
expression of intension to accept an offer is not a valid acceptance. A proposes by letter to
purchase B's house. B expresses his intension to sell it to A but does not send a reply to him.
The house is sold to C, despite B's intension. He has no legal remedy to against Bit may
Express or Implied- When an acceptance is given as words spoken or written, it is called
express acceptance. When it is given by conduct, it is called implied acceptance. It must
follow the Offer- Acceptance must be given after receiving the offer. It should not precede
the offer. Acceptance always follows the offer.
It must be given within Reasonable Time. In order to be valid acceptance, it must be given
at specified time allowed by offeror. If no time is mentioned, then the acceptance must be
given in a reasonable time. M implied for certain shares in a company in June but allotment
was made in November. M refuse to accept the shares, it was held that M could refuse to take
shares offer has lapsed after the expiry a reasonable time. An acceptance is a "final and
unqualified expression of assent to the terms of an offer". The idea of finality and meeting of
minds is important. However, there are many situations in which the meeting of minds will
not be clear, e.g. what if:
 The terms of the acceptance are not identical to those of the offer, Acceptance hasn't
been communicated,
 There is a prescribed method of acceptance,
 Silence is used to accept,
The terms of an offer and acceptance.
The general rule is that the acceptance is an unqualified expression of consent to the terms
the offeror has offered. Thus an acceptance which tries to vary the terms of the offer is not
an acceptance. In fact it will be a counter-offer, which implies a complete rejection of the
terms in the original offer. With counter-offers, the offeree then becomes the offeror offered
to sell his farm to C for 1000, C then offered 950 but D refused. C then wrote back agreeing
to pay 1000 but D never replied. Such that no contract had been formed as the offer to pay
950 was a counter-offer which completely rejected the earlier offer and thus the C could not
go back and later accept it. It is important to be careful, however, when construing
statements as counter-offers as they may in fact be requests for information. Thus if Claimant
had written back saying "are you willing to pay 950" rather than "I'll pay 950", this would have
been a request for information and the original offer would have remained open for
acceptance.
For instance, C quoted D a price for some machinery and stated delivery would be within 10
months. On the back of the quotation was a set of terms, one of which provided for an
increase in price if the cost of the machinery, delivery etc. increased. By the time the
machinery was delivered there had been a massive increase in price and the D rejected the
excess charge. They relied on a clause in their own terms and conditions on the back of their
order (which they sent after the quotation) which did not contain any variation clause. The
court held that the terms on the terms on the order had been different enough to constitute a
counter-offer and the acknowledgment of order by C had been the acceptance. Thus the
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defendant's terms prevailed, notwithstanding that the claimant had made reference to their
own terms after the acknowledgement.
Communication of an Acceptance The general rule is that in order to be valid, an
acceptance must be communicated to the offeror. Otherwise, an offeree would be unaware
that they were bound in a contract. There are, however, exceptions to this. It is possible for
a person making the offer to waive the right to receiving an acceptance.
Prescribed Method of Acceptance An offeror is permitted to state how the acceptance must
be communicated. If the terms of the offer state that an acceptance must be in a certain
format, then any deviation is likely to render the acceptance invalid. Whereas, it is possible
that if the terms do not stipulate the mode of acceptance in a mandatory way, then any form
of acceptance will be valid as long as it is not more disadvantageous to the offeror (e.g. if the
offeror says acceptances by email or phone, but the offeree faxes and the offeror has no fax
machine to receive the fax). The answer will depend on an interpretation of the term.
Can Silence be an Acceptance? Generally, silence cannot be an acceptance as, obviously,
there would be extreme uncertainty as to whether a contract has been concluded or not. The
rule seems less obvious in a situation where an offeror makes and offer and says that they will
consider it accepted within 7 days unless the offeree rejects it.
The Moment and Place of Formation of a Contract The contract arises at the moment when
and at the place where consensus is reached. The exact moment of consensus is important in
order to decide whether the offer can still be revoked, whether the offer has expired as a
result of the passage of time, and when the contractual duties become enforceable, for
example the moment from which payment of interest must be calculated. The place of
formation is important in determining, for example, the court which has jurisdiction to hear a
clam in connection with the contract.
Where the offeror and the offeree are in each other’s presence If the offeror and the
offeree are in each other’s presence when the offer and acceptance are made, it is usually
easy to determine the time and place of formation of the contract, since the offeror learns of
the acceptance of the offer at the same time and place the acceptance is made known. The
contract is comes into being at the time when the acceptance is communicated and at the
place where the parties happen to be at that point in time. This is referred to as the
information or ascertainment theory, according to which the contract comes into being when
and where the offeror learns of the acceptance of his or her offer.
Where the parties are not in each other’s presence If the offer and the offeree are not in
each other’s presence when the offer is accepted, the acceptance is not communicated
directly to the offeror, but via another medium. Where the contract are concluded over the
telephone, the parties are considered to be in each other’s presence as the offeror learns of
the acceptance of the offer at the same time it is made. Although the offeree and offeror
may not be in the same place, the ascertainment theory applies and a contract comes in to
being at the moment when and at the place the offeror becomes aware of the offeree’s
acceptance of the offer. The situation is different when a contract is concluded by post.as
there is no instant communication, different rules apply in these cases the dispatch theory
( also referred to as the ‘expedition’ theory) applies and the contract comes into being at the
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place where, and the time when, the letter of acceptance is posted, unless the parties
stipulate otherwise. The dispatch theory is primarily aimed at protecting the offeree.
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) provides.
However, since meeting of mind is inferred from offer and acceptance made by the parties,
the law is often concerned with the objective appearance of the offer and acceptance than
the actual fact of the intention of offeree or offeror. The person is bound whatever his real
intention may be if a reasonable man would believe that he was assenting to the terms
proposed by other party and upon such belief he enters into a contract with him. Parties are
to be judged not by what is in their mind but by what they have said, written or done. So
nobody could be bound by an intention (estate of mind) which is not included in the offer or
acceptance i.e. a person cannot claim to avoid a contract by citing reservations or restrictions
that has not been made clear to the other party through offer or acceptance Art 1680(2).
When the law in forces the intention (consent) of the parties it does so, so that the parties’
reasonable expectation is protected.
Any intention of a party not included in the offer or acceptance never forms part of the
contract. Therefore, obligation that one of the parties wants to be included in the contract
never binds the other party unless such party knew and agreed to be bound by it. In short Art
1680 is a repetition of Art 1679 and hence may even be deleted from the code that the
offeree shall use to give a response (Art. 16811(2). So Offer may be made in writing, orally, or
by signs or conduct (Art.1681 (1). Written declaration of offer is when all the elements of
offer are reduced in writing on a paper or electronics and delivered to the offeree. Then the
offeree understands the intention of the offeror by reading the paper or the electronics
containing the offer. So, if the offeree cannot read for whatever reason there must be
someone who reads it to him. For example, if the offeror sends his offer through email or fax
such is written communication of an offer.
Oral commutation of an offer is when the offeror uses voice to tell to the offeree the
contents of the offer and the offeree uses hearing (ears) to know what the offeror is
communicating to him. So using telephone, telegram etc to communicate an offer is oral
communication of offer. In short the offeror uses his mouth and the offeree uses his ear for
communication. Signal communication is of two types: gesture and object placed to give
information. Gesture is one of the four ways of communication. Mute or/and deaf people use
such way of communication. Such person makes an offer by using signal communication.
Nodding head, shaking hands and hammering down in an auction sale are also communication
by gesture. Objects may also be used to express an intention. For example in a commodity
exchange market, objects are utilized to indicate intention to be bound.
Communication of offer by conduct is when the offeror performs partly or wholly the
obligation that he will perform if the contract is entered into. Earnest is the best example of
offer by conduct (Art.1883). In this case the offeree uses the combination of his sight or/and
ear and mental intellect to know and understand intention of the offeror. Offer by conduct is
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an implied offer because the offeree is forced to infer the offer from the conduct of the
offeree. Offeree may infer different obligation from what is intended by the offeror. So care
must be made by the offeror that his conduct is clearly understandable to the offeree. In
principle, an offer is binding on the offeror only if it is addressed to a specified person (Art
1687- 1688). The reason why the offeror is expected to know the offeree and address his offer
to him may be to make sure that the offeror has intended to be bound by his offer and to
avoid the possibility of multiple acceptances for a single contract.
The person may want to advertise his product or service without any intention to be bound by
the content of the advertisement. The person advertising a product or service may not have
the product or service at his disposal and he may be making a market study i.e. he may want
to know the demand for his product. This means although he states the type of product or
service he wants to supply and the price he expects he might not intend to be bound.
E.g. A certain college releases the following information on Addis Zemen Newspaper. “our
college is going to open Degree Program in Business Management. Tuition free is birr 500 per
month. It takes only 30 months to complete B.A. the program any person who has completed
preparatory or has Degree in any other field is invited to apply soon.”
A person may also release the idea moving in his mind to a friend or even to the public either
to ask advice or to know public opinion so that he can decide whether or not he has to make
an offer. Therefore, if a person “does not make his intention known to the beneficiary of the
declaration” such declaration shall not be taken as an offer (Art 1687 (a).
E.g. Abebe told his mother, Alemitu, that he is happy if his father, Belachew accepts his
Mercedes Benzes, 2007 model as donation. Alemitu told the same fact to Belachew.
Moreover, if offer is communicated to the public, many may come to accept the contract.
This creates inconvenience of choosing a person whose acceptance should be binding on the
offeror. So the easiest way out of such inconvenience is to consider the declaration that
become the source of such controversy as non- binding. In such case ultimate goal of the
declaration of intention shall be advertisement of the product or service. Therefore; the
following declaration of intention are not offer but advertisement.
Sending price lists or tariffs (Art 1687 (b) Here, the price list or tariff may be sent to
specified address or a specified person but still such act should not be taken as an offer
because of the following reasons.
Dedication to be bound is missing. Such price list/ tariff alone never indicates the intention
to be bound. The document sent contains the price list/tariff which may be taken as content
of the contract but the declaration of intention to be bound is missing. Such is, therefore;
neither a written nor oral offer. Signal communication is using body gesture or identified
object as an expression of one’s intention but sending of price list /tariff does not fulfill such
requirement. Offer by conduct is beginning to perform would be obligation but not sending
price list. Price list/ tariff never indicate all terms of the contract such as due date, place of
performance, quantity , etc. So it is not complete even if the person to whom it is addressed
responds positively (Art. 1695(1).Customarily sending of price list/ tariff is taken as an
advertisement The price list/tariff might have sent to many creating the problem of
multiple acceptance.
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E.g.1 Moha Bottling PLC has recently started producing beverage in the Hawassa and it
prepared the following and sent it to Taddesse Hotel “Moha is ready to supply the following
Pepsi products” with the corresponding price
Product Unit price

Pepsi cola 0.8birr
Mirinda 0.75birr
Sprit 0.6 birr
Mirinda tonic 0.9 birr
E.g.2 General Garment PLC distributed the catalogue of its services to Graduating students of
Addis Ababa University.
Posting up price list/tariff and catalogue in a public place
This declaration of intention is not an offer mainly because there would be multiple
acceptances if the declaration of intention is to be considered an offer. Everybody may have
an access to the declaration. Posting is announcing to a public by using – all possible means
such as press, radio and television. It also includes affixing a notice on board, wall, poles, and
car or on any other object.
Eg1 commercial Bank of Ethiopia published the following information in Ethiopian Herald
“Commercial Bank of Ethiopia is intending to employ any person having Accounting degree.
Work place is Hawassa, salary is birr 3500 per month .Employment is permanent. Interested
applicant should submit his CV until 20 Jan 2008 ”
Display of goods for sale to the public
Almost all sales are sale at open market. Every person passing by can have a look at the goods
and can easily infer that the goods are ready for sale .But there may be multiple acceptance
and the content of the contract is also incomplete .Display of goods does not include some of
the contents of the contract such as performance date and place and quantity. Display of
goods could utmost contain the type of goods and their prices (see example given by G.
Krzeczunoviwicz).
Sale by Auction (Art.1688). It is inviting possible offeror to come and make an offer. Many
may come and make an offer and the person who invited such offer may freely determine
which to accept there by rejecting others. The invitation may either be to buy or to sale. (See
auction sales from newspaper and report to your Instructor in a class, Read also Art 2403-
2407.)
Public Promise of Reward (Art 1689)
As stated above, a declaration of intention to be bound by specified obligation becomes an
offer only if it is addressed to an identified person. An exception to this principle is public
promise of reward. Public promise of reward is notifying the public that whosoever performs
a certain act indicated in the notice will be given benefit of proprietary nature by the
promisor. It is a reward that is promised to be given for an extra ordinary performance or
coming across an object lost or person hidden .The promise is public because it addresses to
all which performs the required act. No discrimination is made on those who may benefit
from the promise.
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If a promise of reward is to a specified person or group of persons it becomes an ordinary

offer if it is made to be known to such a specified person or group of persons. In such case,
the promisor can use any means to communicate his intention to the specified person or
group of person. It is enough to prove that the promisor has really intended his declaration of
promise to reach the specified persons or group of person. Such intention can be ascertained
from the circumstances and especially from the means that the promisor uses .For example,
if the promisor uses public media such as press, radio, Television, electronics and etc to
which the specified person or group may have access, the declaration of intention may be
taken as an offer if the specified person/group of person has come to know such declaration.
In case of public promise of reward the media of declaration never matter and the person
who performs a specific act in the promise need not know the promise (Art 1689). In short, a
public promise of reward is special offer.
Effects of Offer (Art.1690, 1691, 1693(1), 2055)
This is the effect the offer is to bind the offeror. Once the offer is made, it means one side of
the parties to the contract (the offeror) has agreed to be bound. Offer contains would be
obligation i.e. the content of would be contract is defined by offer. This indicates that the
conclusion of a contract is partly completed. The party making an offer cannot change his
opinion. That is why it is necessary to distinguish an offer from mere declaration. A person
making mere declaration of intention can change its declaration at any time it wants for
whatsoever reason without any legal liability for unreasonable and arbitrary change of its
intention. It is obvious that if declaration of intention is not an offer, it is full autonomy of
the person who declared such intention to live up to his declaration or change his intention
for whatsoever reason. However, an offer cannot be changed by the offeror for unjustified
reason. An offeror who changes his offer partially (make some modification to the content of
his offer) or totally (refusing to be bound by his offer) is liable for any material damage on
the offeree.
If offer is binding, where does it begin to be binding? There might be time gap between the
offeror’s release of the offer and the offeree’s reception of the same. This is true especially
when written form or conduct is used to communicate an offer. For example, an offeror may
use letter or fax to reach the offeree. So the offer begins to be binding at earliest from the
moment the offeree knew its content. Any declaration of intention to be bound by a contract
may not even be considered as an offer for the sole fact that it has not yet reached the
offeree (Art 1687). So the offeror can freely change the content of his offer or totally
withdraw it before it reaches the offeree (Art 1693(1). The offeror can make his offer not to
reach the offeree by informing the offeree that change has been made to the content of the
offer or that it has been withdrawn. This has to reach the offeree before he receives the
offer or at latest before the offeree takes decision that affects his material interest on the
assumption of the offer (Art 1693). This means an offer may be withdrawn or modified as far
as the offeree has not incurred expenses with a view to concluding a contract with the
offeror. So what is crucial is not the time when the offeree received the offer but the
decision he has taken due to his knowledge of the offer. The offeror can change or withdraw
his offer at any time before the other takes decision that affects his interest. So the burden
of proving that the offer is changed or withdrawn after he takes decision that affects his
material interest is on the offeree. Changing or withdrawing an offer is a fault (Art.2055).
Page 14
Change or withdrawal of an offer is not a fault when it is withdrawn or changed.

a. before the offeree knows the offer or
b. at the time the offeree know the offer or
c. at any time before acceptance for justified reason
Even if modification or withdrawal is made contrary to the above precondition, the offeror
may be liable only if the offeree proves that the offer is the cause for his loss.
How long does the Offer Bind? As we see above offer is binding from the moment the
offeree knows its existence. Such tells us the time than the offer begin to produce effect. If it
begins it must also end somewhere. Everything that has beginning must also have end. The
offeror should be given an opportunity to be released from his offer or else how long will he
wait for acceptance. The offeror may himself determine how long the offer remains binding.
For example an offeror may indicate in his offer that acceptance be made within ten days
from the moment the offeree knows the offer. After expiry of such ten days the offeror can
change, modify or withdraw his offer for whatsoever reason and without any liability to the
offeree (Art 1690).
In case the offeror fails to fix time limit for acceptance, the offer remains binding for
reasonable period only (Art 1691). Reasonable period indicates the time that the offeree
needs to understand the offer and decide to accept or reject it. So if the offeree remains or
unable to decide within such reasonable time the offeree will no longer be bound by his offer.
But the crucial issue is “how long is a reasonable period” The length of reasonable period
should be the average time that the average person may need to determine on the offer.
The circumstance of the offeree should not be taken in to account to determine the length
since contract is not a charity and the offeror is running for gain and has no legal or moral
obligation to sacrify for subjective weaknesses of the offeree. However, objective criteria
such as the existence of current price for the subject of contract, market stability, and
complication of content of the contract should be taken into account. For example if offer is
made for sale of coffee in Ethiopia, the offeree may be expected to respond in hours and a
response coming after days may be taken as not coming within a reasonable period. On the
contrary an offer for a construction may be reasonably binding for weeks. Market stability is
also very important to determine the reasonableness of the period since in case of market
instability price changes now and then thereby affecting the decision of both the offeror &
offeree. So when there is market instability reasonable period should depend on the
frequency of price change. For example in Ethiopia price of fuel is revised every three months
and such revision probably affects the advantage of either parties. So court should consider
such other similar facts affecting market price.
Whenever the court is not convinced that the period is reasonable, it should conclude that
the period is unreasonable since any doubt should benefit the defendant (Art. 1738,);
whosoever, claims the right has a burden to prove the existence of such right. We have to
bear in mind that if the acceptance reaches the offeror after expiry of reasonable period the
offeror has a duty to inform the offeree the lateness of the acceptance by using the speediest
medium of communication available. Such medium should at least be as speedy as the
medium used by offeree to send his acceptance. Using the speediest medium is not enough,
the response should be made at the moment the offeror receives the acceptance. So if the
Page 15
offeror fails to reject the acceptance immediately the offeree has the right to claim that the
acceptance was given within reasonable period and hence contract was concluded (Art
1691(2).
The third ground that terminates the effect of an offer is the offeree’s rejection of the offer
(Art 1690(2). Rejection of an offer is, either making modification to the content of the offer
or sending a “no” answer to the offeror. Offer is deemed to be rejected “where acceptance is
made with reservation or does not exactly conform to the term of acceptance” (Art 1694).
Art.1690 (2) expressly provides rejection of offer as a cause of termination of offer where the
offer contains fixed period of time for acceptance. The same should apply to cases under
Art.1691. There is no logic for offeror to wait for an expiry of reasonable period once the
offeree rejects the offer. Even one can argue that once the offeree rejects the offer, it shows
that the reasonable period has already expired since reasonable time is the time that is
sufficient for the offeree to respond. But since reasonableness should not depend on the
subjective situation of the offeree we may still say that rejection of offer may be made
before expiry of reasonable period. But still the rejection releases the offeror because there
is no justification for the offeree to get time to revoke his rejection and claim to accept the
offer simply because the objective reasonable time has not yet expired. There is a less
possibility that an offeree who once rejected an offer could come to accept the same and
forcing the offeror to wait such change of mind is fooling him and inequitable..
Acceptance (Art 1681-1685, 1689(1), 1694) (1893(3)

Acceptance is a positive response to an offer i.e. it is a declaration of intention to be bound
by each and every contents of an offer. In short acceptance is a “Yes” answer to all the
contents of the offer. Any slightest modification made to the content of the offer is
considered as rejecting the offer and making, an alternative offer (Art.1694). So the offeree
must take care in giving response to an offer. He has three alternative answers to an offer,
the “yes” answer which means accepting the offer as it was made; the “No” answer which
means totally rejecting the offer or “acceptance with reservation” which means having
reservation or alternative proposals for some of the contents of the offer. So “where
acceptance is made with reservation or does not exactly conform to the terms of the offer”
the offeree must remind himself that he is taking the position of the offeror and the offeror
then becomes an offeree (Art. 1694). That means the offeree (the current offeror) is bound
by the new offer he makes until the time limit he fixes for acceptance expires (Art. 1690(1)
or until he reasonably expects the other party to decide on the new offer (Art.1691(1).
Eg.1 Abebe wrote the following e-mail message to Tuffa”
“Dear Tuffa, how are you doing? I am very fine, I am going to sale my Toyota Land cruiser, 99
model automobile to you to birr 30,000. Delivery and payment date is on January 20, 2008 In
Addis Ababa”
Tuffa may respond in any of the three ways.
“Thank you, I am lucky to buy your car.”
“Thank you for your concern, but I do not need any automobile now!”
“Thank you. I am very much happy to buy your car but the delivery place should be
in Awassa”
How acceptance is made
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Since acceptance is communication of intention, like an offer, it can be made in all possible
ways of communication. So, the offeree can use writing, oral, sign or conduct as a means of
communication. The medium of communication never matters. The offeree may use letter,
press, telex, email, etc to communicate his acceptance in writing. He may also use
telephone, telegram, video, radio, television etc as a medium of oral communication. Signal
communication is showing certain publicly known physical gesture such as shaking the hand of
the offeror, nodding head or using certain objects publicly used to indicate
intention(Art.1688(2). Signal communication usually requires the physical presence of both
the offeror and the offeree at the same time and at the same place. Communication of
acceptance by conduct means performing partly or fully the obligation proposed by the offer
or benefiting from the rights proposed by the offeror.
E.g1 If a person who is offered to buy a certain goods comes and takes some or all of the
goods or if he pays part or all of the price of goods, such act may be interpreted as an
acceptance by conduct.
Generally, an acceptance can be given provided the offeree knows the existence of the offer.
Acceptance is declaring agreement which presupposes knowledge of the obligation for which
the agreement is given. However; if the offer is public promise of reward the offeree is not
known to the offeror; hence whosever performs the promise is considered as if he accept by
conduct regardless of his knowledge of the existence of the offer (Art. 1689(1).
Duty to Respond (Art. 1682 -1685)
The offeree does not have a duty to give response to the proposal of the offeror. He can
respond negatively or positively only if he wants to respond otherwise he may for example
read an offer and simply throw it in a dust basket or tear it off by reading only the address of
the letter. That means the offeree has the right to remain silent; no one is allowed to disturb
his peace. Moreover; if the offeree remains silent there is no assurance that the offer was
brought to his attention; he might have not known the existence of offer. Therefore silence
shall not amount to acceptance (Art. 1682). It should not be taken as a signal indication of
acceptance. However, in the following cases the offeree has a duty to respond a “no” answer
if he does not want to be bound by an offer, otherwise his silence may be taken as a sign of
acceptance by the offeror.
a. Duty to accept: - sometimes a law or contract may impose on the offeree the obligation to
accept offers made to it. This is mainly when the offeree is a monopoly supplier of goods or
provider of services. Some public enterprises are established by law to provide goods and
services to the public, hence they are duty bound to accept an offer from the public. For
example, Ethiopian Electric Power Corporation, Ethiopian Telecommunication, Water &
Sewerage Authorities are expected to accept offer for electric use, telephone line and pipe
line. If they do not want to be bound by the offer they have to notify with in time specified in
the offer, if any (Art. 1690(1) or within a reasonable time (Art 1691(1). Otherwise their
silence is considered as an acceptance (Art.1683).
Private Business Enterprises may also have a contractual relation with state agency to supply
certain goods or provide services to the public (see Art.3207-3243 which provides about
contract of concession). In such case the concession (the contract between the business
Page 17
Enterprise and state organ) may lay down the content of the contract that will exist between
the Business enterprise and the service seeker.
E.g. Addis Ababa City Administration and Cleaner Private Limited Company agree as follows;
Art. 1 Addis Ababa City Administration shall pay Birr 2,500,000 to the Company at the
beginning of each fiscal year.
Art.2 The Company shall give toilet service at a distance of 1km in every Asphalted road.
Art 3. The Company shall provide toilet papers to the service seekers.
Art.4 The Company may charge only ten cents for one time use of the toilet service.
This contract may be taken as a concession contract as it defines the obligation of the
company and the service seekers in advance. So, the offer of the service seeker is limited
only to declare his intention to be bound by the contract whose object was already defined,
by the government. In short the offer of the service seeker contains only his intention to be
bound and his request to the offeree to agree to be bound. So if such offer is made the
silence of the offeree will be taken as an acceptance. In addition to those bound by law or
concessions, a person may have a contractual obligation to accept an offer made to him as
per his contractual obligation. This is in line with Art 1711 and Art. 1957. So in such case also
silence is taken as acceptance. So such offeree has an obligation to respond to the offeror if
he does not want to be bound by the offer. N.B. The literal meaning of Art.1683 is that once
offer is made, acceptance is automatic. Sub Article 1 declares that when a party is bound by
law or concession to accept “no acceptance shall be required”. This is further strengthened
by sub – art 2 which states that “the contracts shall be complete upon the receipt the offer”
thereby implying that the offeror can claim performance of the contract once the offer is
delivered to the offeree. However; such interpretation seems to be illogical for the following
reasons:
Contract depends on agreement of contracting parties. There is no contract without

consent. The level of consent may be highly limited but should not totally be avoided. So the
offeree should at least be given the chance to study whether or not the offer has been made
as per his legal or contractual obligation. So the mere reception of the offer may not
complete the contract and the offeree should be given the chance to say “ok” or “No” for the
offer. So Art. 1683 (2) indicates date of conclusion of contract only so far as the offer was not
rejected.
The offeree may lack resource to accept the contract. For example, many customers may
apply to Ethiopian Telecommunication to get telephone line but the corporation may not have
resource to meet the demand..
The offeree may have legal or contractual or legal authority to stream line offerors. In
principle, Ethiopian Electric Power Corporation has to supply electric power service to every
person who demands the service. But when offerors are many, the Corporation may give
priority to investors.
The offeree can refuse to perform his contractual or legal obligation In such case the
offeree may be responsible for breaking its legal or contractual obligation for not accepting
Page 18
the offer but it is difficult to conclude that it automatically accepts offer declared to it.
Therefore Article 1683 should be understood as imposing an obligation to respond to an offer.
Such conclusion is in line with Art. 1682 and 1684 i.e. Art 1683 is an exception to the right to
remain silent. So Art.1683 should be amended as follows.
Art. 1683-2 Duty to Accept
Where an offeree has legal or contractual duty to accept an offer the offer shall be
deemed to have been accepted unless the offeree rejects the offer with in time specified
in the offer or where no time is specified within reasonable period.
B .Preexisting Contractual Relation Silence may also amount to acceptance where the
content of the offer is to vary, supplement or complement preexisting contractual relation
(Art. 1684 (1). Variation of a contract means changing, modifying or avoiding some of the
provisions of the contract. Variation of contract itself is a contract and hence needs consent
of parties. So, one of the parties may offer such variation. For example, in a sale contract,
the buyer may offer to change the delivery date. Supplementary or subsidiary contract is a
contract that may exist independently but that help to facilitate the implementation of
preexisting contract. E.g. you bought a cloth and the seller offers you to tailor the cloth; you
bought goods and the seller offers you to provide transport service; Photocopier proposes to
bind the paper it has photocopied; a contractor who builds the house proposes to construct a
fence for the same building. Completing a contract means some of the issues not settled in
the preexisting contract be agreed up on again. For example parties in a sale contract agreed
to be bound by the sale (Art 1695) but not determined place of delivery. Any party to such
contract may make an offer concerning place of delivery. If the offer is accepted it
complements or completes the preexisting contract. Complementary contract is subordinate
on the main preexisting contract.
i) the offer is made in writing. In principle offer can be made orally, in writing, by
sign or conduct depending on the preference of the offeror. But silence can be
interpreted as acceptance only if the offeror uses written form of communication
that is addressed directly to the offeree (Art 1684(2).
ii) the offer should be written on special document (Art 1684 (2). The document that
contains the offer should contain nothing else than the offer. So offer written on the
back of an invoice should not be deemed to have been accepted by silence
(Art.1685). Moreover, offer should be written on a paper. E-mail is not a document.
iii) The offer contains warning that silence amounts to acceptance. The offeror should
also expressly indicate in his offer that he considers the silence of the offeree as
acceptance after expiry of time limit indicated in the offer Art. (1690(1) or
reasonable period (Art.1691 (1) (Art 1684 (2)
So if the above four conditions are fulfilled both the offeree and offeror can claim that
silence amounts to acceptance
N.B The offeree’s freedom of choice of means of communication may be limited either by the
offeror (Art.1681 (2) or by the law (Art.1689 (1).The offeror may choose any of the four ways
of communication and inform the offeree to use only such chosen means. If the offeree uses
another means than chosen by the offeror the acceptance is defective since it does not
Page 19
exactly conform to the offer (Art.1694 (1). Public promise of reward is accepted by conduct
only.
Effect of Acceptance
In general, it can be inferred from Art 1679 and 1693(2) that once an offer is accepted the
offeree is bound by his word. Once we know that acceptance is binding the question that
comes to our mind is “the moment at which acceptance begins to be binding.” In other words
“does acceptance begin to be binding at the time the offeree says “yes!” to the offer or at
the time such “Yes” answer is received by the offeror”. Such question becomes relevant when
acceptance is communicated in writing or by conduct since in such case the time the offeree
writes the acceptance or begins to perform the obligation stipulated in the offer may differ
from the time the offer knows such fact. For example, Alemu offered to Abebe to buy his villa
for birr 500,000 and Abebe wrote letter of acceptance on January 26, 2008 but such letter
reached Alemu on March 20, 2008.
Art 1692(1) of the code has answer for this. It provides that acceptance becomes effective
from the moment the offeree sends it to the offeror. Here it is not from the moment an
offeree writes a letter of acceptance but from the moment he put it in a post office or if it is
email, from the moment he clicks the “send” button of his email box. Therefore; the consent
element of contract is fulfilled at the moment the offeree accepts the offer regardless of the
knowledge of the offeror. This means an offer can be accepted even after the death of the
offeror unless the heirs withdraw such offer in accordance Art. 1693(1)
However; the acceptance must reach the offeror or his heirs before expiry of time limit
specified in the offer (Art. 1690) or reasonable per (Art.1691 (1). If the acceptance does not
reach the offeror cannot know whether or not contract is concluded between him and
offeree. If he has not received acceptance within Art. 1690(1), 1691(2) he can presume that
his offer was rejected. In short acceptance begins to produce effect from the moment the
offeree sends it to the offeror provided it reaches the offeror within time specified under Art.
1690(1) or 1691(2)
The offeree may abort the contract by withdrawing his acceptance (Art.1693 (2). He can
freely withdraw his acceptance before the offeror knows such acceptance through the
medium the offeree uses to communicate the acceptance to him i.e. if the offeror knows the
acceptance earlier than the offeree expects from a friend or other sources; the offeree can
still withdraw his acceptance regardless of the knowledge of the offeror. For example, in
response to an offer made to him by Bacha, Alemu wrote a letter of acceptance to him and
send it through post office. While sending the letter, Alemu got Gifawosen, a friend of Bacha,
and told him that he (Alemu) is sending letter of acceptance to Bacha’s offer… Gifawosen told
to Bacha that Alemu accepted the offer. Alemu can withdraw his acceptance until Bacha
receives the letter unless it is proved that Alemu requested Gifawosen to inform such
acceptance.(see also Art. 1687(a) which provides that declaration of intention is considered
an offer only if the offeree knows it from the sources the offeror uses to reach the offeree).
For more detail discussion on this point please see our discussion on effects of offer (Art
1693(1).
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General Terms of Business No party can be assumed to be bound by general terms of

business which he did not agree to be bound with (Art 1685). General terms of business are
internal rules of a party that may have direct relevance to the obligation of the other parties.
Such general terms are frequent in employment contract and other big institution which are
monopoly suppliers if goods or service. The University Senate legislations are best examples
of these general terms of business. Denying legal effect to general terms of business is one
means of customer protection. However if these general terms of business are proclamation,
regulation or directives issued by competent authority they are treated as law as far as they
do not contradict with superior law (Art 1986). To be bound by an obligation one has to know
it and agree to be bound (Art 1679). So any annexes to main contract never bind a party who
has not known its content and not agreed to be bound. Knowledge about the existence of the
annex is not enough. For example, an instructor might have known the existence of senate
legislation which provides more obligations than in the contract he signs. Such knowledge is
not sufficient to be bound by such senate legislation. He must be informed that such senate
legislations are part of the contract before he signed such contract. Otherwise he can treat
the senate legislation as a morally binding instrument with no legal effect. Moreover, if the
instructor accepts such legislation without knowing its content, he should not be bound since
he did not participate in defining the object of such subordinate contract (Art 1679).
Negotiation vs. Consent (Art.1695) Negotiation is when one party proposes to the other some
of the contents of would be contract leaving the remaining to be completed or proposed by
the latter. The latter may also propose some and still leave others undetermined and sends
them back. Here both parties may use all possible moral and legal techniques to persuade the
other party to accept the proposal or to come up with more favorable offer. So in short
negotiation is a discussion made between parties intending to shape the content of would be
contract. Therefore any proposal made during negotiation is not binding on the party making
the proposal i.e. a party may withdraw from the negotiation at any time (Art 1695 (1).
However; if the negotiation is completed (content of the contract is determined) and both
parties agree to be bound by the negotiation then it ends up becoming a contract (Art 1695
(1). In negotiation, it is very difficult to know the party who made an offer. However; we may
take as an offeror the party who proposes the content of the contract last. Parties need not
reach agreement on all contents of the contract. They may expressly agree to be bound by
contents of the negotiation there by leaving detail to be completed by the law (Art 1695 (2).
For example, parties may negotiate sale of 500 quintals of coffee and agree to deliver on Oct.
25 but fail to reach agreement on price but the coffee is delivered. The delivery will be taken
as implied consent and the price will be determined by law (see Art. 2306).
Defect In Consent (Art 1696 – 1710) : If the consent expressed in the form of offer and
acceptance does not indicate what the offeree or the offeror really intended then there
exists defect in consent. The cause of defect in consent is either wrong information (mistake,
false statement, fraud) or threat (duress, reverential fear, threat to exercise rights) or lesion.
Defect in consent may be a cause for invalidation of contract (Art 1696). However, the
existence of defect in consent does not necessarily lead to the invalidation of contract. Firstly
defect in consent can invalidate a contract only if a party who agreed to be bound because of
information or threat demands invalidation (Art 1808). Secondly in some cases the party
whose consent was defective may not be entitled to claim invalidation (1708, 1709, and
1710).
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Defect of Consent due to Wrong Information: Mistake, fraud, and false statements may lead
an offeror or offeree to have wrong knowledge about the content of the contract i.e. a person
is passing a decision to be bound on the basis of wrong information. Let us see each of these
causes of wrong information in some details.
Mistake (Art 1996- 1703) is when a party makes misunderstanding on the content of the
contract or on the identity of the other contracting party. The person might have committed
such misunderstanding either because of his own poor inference from given facts or false
statement or deceitful practice of others person. Please see the following examples
E.g.1. a buyer purchased a bracelet believing that it is 21 carat gold and latter on found out
that it is 14 carat gold. A seller says nothing to the buyer about the quality of the bracelet.
E.g.2. Kebede informed Belay that a certain tablet can cure hair fungus and Belay bought such
tablet and discovered latter that Kebede was lying and the tablet is contraceptive pills.
E.g.3. Zenitu locally produced edible oil from corn and packed it in the container of
internationally produced edible oil.
One can invalidate or avoid his obligation on the basis of mistake if the following two
conditions are cumulatively fulfilled (Art 1997, 1998).
A/ mistake must be fundamental (Art 1998) – A mistake is fundamental when a person

misunderstands the object of the contract or the person with whom he has entered into the
contract. Art 1698 defines “fundamental mistake” in a very vague manner there by inviting
interpretation. The clue for such interpretation is the clause “elements of the contract which
the parties deem to be fundamental” found in the same article. The phrase element of
contract under Article 1678 indicates consent, capacity object and form of contract but such
meaning does not apply to Art 1698. paragraph 1 of title 12 (Art 1979 -1695) also talks about
elements of consent to indicate offer and acceptance so from the above two we can
understand that “elements” indicates requirements, parts or contents of something. So
elements of a contract should mean “content or object of a contract”.
It is nothing but the content/ objects of the contract that both parties to the contract
consider as important or relevant to their relation. In a contract the primary concern of the
parties is mainly to keep their obligation to the possible minimum and keep their benefit to
the possible maximum. So their primary attention is an object (rights & duties of parties to
the contract). Therefore, the element of the contract which the parties deem to be
fundamental is the object of the contract. This is also impliedly included in the heading and
contents of Art 1699 which takes about nature or object of contract. Mistake relating to the
identity of a contracting party is also fundamental mistake. In short a mistake is fundamental
when it related to the object or nature of a contract or identity of the contracting parties.
Nature of contract refers to types of contract. For example, a person intended sale contract
but in fact entered into service contract, or agency is mistaken for employment contract or
usufruct for lease, loan for donation etc.
Page 22
E.g.1. Abebe bought a shoe believing that it is Italian product although it is Turkish product.
E.g.2. Shewaye bought a house from Alem for 100,000 dollar although Shewaye thought that
the price was indicated in Euro.
E.g.3. Ashagre employed Shegrawaw as his lawyer believing that Shegrawaw is the one who
defended genocide cases in Tanzania before international tribunal but this Shegrawaw is the
one who was recently graduated from private college as junior lawyer.
The law also attempts to indicate what “fundamental mistake” means by telling us non-
fundamental mistake (Art. 1701). Mistake of the motive of a party or arithmetic mistake are
non-fundamental. In contract it is presumed that the immediate and important motive of the
parties is to make object of the contract favorable to them. Any other motive is secondary
and hence non-fundamental. The direct cause of the contract is presumed to be the economic
benefit that the parties derive from the contract. Such motive is clearly observable from
offer and acceptance and is expressed as an object. Moreover; motive not expressed to the
other party is not binding (Art 1680 (2). So any motive not observable from offer and
acceptance is not an element of a contract (Art 1698 cum. 1701)1).
Arithmetical mistake is taken as non- fundamental mistake because it can be easily corrected
(Art 1701(2). This happens when both parties accept the arithmetic mistake. But if the
arithmetic mistake is claimed by one party only, it may be fundamental mistake. For
example, Abebe signed a check believing that it orders a payment of 50,000 birr although the
check indicated birr 500,000 which the payee read and accepted. In this case, the payee
accepted the check believing that it carried an order of 500,000 birr but Abebe believed it to
be 50,000 birr.
A mistake is arithmetic when amounts, numbers or even provisions are missed or improperly
typed due to clerical error regardless of the common intention of the parties expressed in the
form of offer and acceptance. For example buyer and seller agreed that the sale price is birr
10,000 but the secretary wrote it to be 1000 and parties sign the contract without noticing
such error. Generally it is editorial error and may also be applied to any other editorial error
such as missing of provisions that indicate rights and obligation of the parties e.g. in a
contract of sale, the phrase dealing with place of delivery is missed although the parties
consented that it be in Addis Ababa. Such mistake is not an arithmetic mistake. This mistake
happens when the contract needs to be made in writing and committed at a stage of
translating offer and acceptance in written form and hence it is not defect in consent.
The mistake must be decisive: the mistake is decisive when the mistaken party proves that
a rational person in his position would not have entered into such contract had it not been for
the mistake (Art 1697). The decisiveness of the mistake should be determined by court taking
into account the surrounding circumstances and subjective conditions of the mistaken party.
Art 1699 (b) also encourages the court to consider subjective condition of the mistaken party.
According to this provision a mistake is decisive where “the mistaken party had undertaken to
make a performance substantially greater or to receive a consideration substantially smaller
than he intended’. Art. 1697 also provides subjective criteria requiring him to establish that
Page 23
he would not have entered into the contract had he known the truth. Generally the purpose is
searching the intention of the mistaken party since contract is binding only when the person
knows his rights and obligation and agrees to be bound. However, knowing intention of such
mistaken party is possible only by putting oneself in his position i.e. ‘what would I do as a
rational person, had I been in his condition’. Remember the golden rule “Do unto other what
you want others do unto you”.
Good Faith of Mistaken Party (Art.1702) The party mistaken must be ready to be bound by
the contract if the other party agrees to be bound as per the intention of the mistaken party.
He should not use his mistake as a pretext to be out of the contract.
Reparation (Art.1703) a mistaken party is not without liability. He is accountable for any
damage that may be caused to the other party (Art 1703). So invalidation of contract on
ground of mistake entails payment of damages. A mistaken party can escape such liability
only if he proves that the others party knew or should have known such mistake (Art. 1703)
Fraud (Art 1704) Fraud is an intentional act of preparing false information or changing or
modifying the content of the subject matter of the contract in a manner that cannot be
noticeable by ordinary observation. Fraud does not mean telling untruth or for bearing from
telling the truth it rather mean making things or document to give wrong information. Such
act is done in order to obtain consent of a person to a contract. The practice of mixing up
banana with butter, red ash with pepper, milk with water, Adaa teff with teff from other
place are fraudulent act. Fraudulent act may be accompanied by false statement. A
defrauded party can demand invalidation of contract where:
A/ the fraud led him to commit decisive error (Art 1704(1). Fraud is a way of making a
person to have misunderstanding either about the content of the contract or identity of the
other contracting or motive of entering into the contract. Here the error or mistake need not
be fundamental. It is enough if it is decisive. For example, Alemu told Challa, a broker, that
he will buy a house in Awassa if he is employed in Hawassa University. Alemu already applied
to Hawassa University for interview and has been waiting response. One day when he opened
his post office box he got a letter that was written to him from Hawassa University. The
heading of a letter contains “Hawassa University” and emblem and it was signed and stamped
by the university authority. By looking at the letter Alemu believed that he got employment
into the University. Being happy of such he bought a house for birr 500,000 through the
brokerage of Challa. Then he went to the University to apply for duty and learnt that the
letter was a fraudulent letter.
B the fraud was committed by the party to the contract or he knew or should have
known the fraud or derived undue benefit.
The defrauded party should also prove that the party himself commits the fraud or knew or
should have known the existence of the fraud or he derived undue benefit. E.g. Ethiopian
National Bank was once defrauded by gold suppliers. The suppliers painted a ‘balestra’ a
golden paint and supplied it as though it was gold. If the bank resells the “balestra” without
discovering the fraud, the buyer may claim that the bank should have properly examined the
Page 24
thing. Generally whosoever sells goods under its control (possession) need to know what he /
she is possessing. Failure to know is negligence. A person should have known the existence of
the fraud means had it not been for his own personal negligence, a reasonable person in his
position would have known the fraud. Moreover, whosoever sells a good in his possession has
a duty to warrant against defect in the thing (Art 2287, 2289). So besides the invalidation of
the contract, a party may be liable to pay damages. A person is generally under no duty to
disclose all facts in his possession to the other contracting party. Each must protect his own
interest unaided by another party. The rule is “buyers beware” (caveat emptor). Keeping
silent therefore, is generally not actionable even though it causes damage to the other party.
However, as an exception to this rule, a contracting party should reveal fraud whenever
possible. Even if there is no act of fraud by the party or he had not and should not have
known the fraud a contract may be invalidated if he has got undue advantage on the
defrauded party due to the fraud. This is in fact can be sufficiently proved if the decisiveness
of the mistake (fraud) is proved.
N.B A party who is unable to prove Art.1704 may resort to proving existence of mistake
although practically proving mistake is more stringent than fraud. Notice that Amharic version
and English version of Art 1704 (2) seems to convey different meaning but by final analysis
they convey the same meaning.
E.g.1 Abebe sold a T-shirt to Ayele. But the package of the T-shirt was damaged and Abebe
repacked the T-shirt and sold it as if its original pack was untouched.
E.g.2 Due to problems in shipping, the paint of car was damaged, and the car dealer painted
the damaged part of the car. So that it was not possible to distinguish the repainted car from
others. Abebe bought one of these cars believing that the painting was original but he later
on discovered that a certain part of the body of the car had been repainted.
E.g.3 Shaka bought shoes, which has trade mark of Anbesa shoe Factory and resold it for the
same price to Shemsu. Shemsu latter on discovered that the person who sold the shoe to
Shaka fraudulently use trade mark of Anbesa shoe factory for a shoe he produced at home.
E.g.4 Zelalem parked his second hand automobile in a sales shop of Moenco. Azerefegn bought
such car from sales shop believing that it was first-hand but Moenco’s sales person or Moenco
knows the fact and connived with Zelalem.
False statement (Art 1705) false statements is untrue statement made

A/ knowingly (intentionally) or
B/ without give being indifferent whether it be true or false (reckless)
or
C/ negligently (Art 1705)
Misleading conducts or silence may also amount to false statement (Art 1705(2). For example,
if a buyer of Bajaj asks a seller whether or not the fuel consumption of the Bajaj is more that
40 km per liter and the seller remains silent, such may be a false statement. In principle
telling a false statement cannot lead to invalidation of contract. A party can lie as much as
possible unless his morality, religion and reputation matters him. In a free market economy it
is believed that neither party owes any duty regarding voluntary information to other nor is
Page 25
he entitled to rely on the other. Each party must study the situation, examine the subject
matter of the contract, assess the general current and future market possibilities, and rely on
his own source of information and judgment. He can take advice consult experts, buy
information from third parties. The only general limitation is that no one can resort to fraud
iIn Ethiopia also there is an Amharic saying a trader never makes profit unless he lies. So a
contracting party is free to lie about the thing he sells or service he renders. He is not
accountable as far as the thing or service is what it appears to be. For example. a buyer
bought CD player that cannot be repaired once damaged. But the seller told him that the CD
player is repairable. However: false statement can be a ground for invalidation of contract
where
A/ there is a special relationship between the liar contracting party and the mistaken
party. Here the special relation should be a legally recognized relation which creates duty to
trust one another. But the duty to trust may be either legal or moral. This is because, firstly
it is very difficult to identify a relationship that gives “rise to a special confidence and
commanding particular loyalty”. Secondly, if we go beyond legal relationship it is difficult to
prove the existence of the claimed relation. For example if we take friendship, it may be
difficult to claim the existence of loyalty on matters of economic interest between friends.
Moreover, it is difficult to prove whether or not the disputants were friends or not since there
is not standard definition for friendship. Thirdly, Art, 1706 (1) itself provides about “special
confidence “and “particular loyalty” and such “special confidence” or special loyalty” is
expected if there is “special or particular” relationship; such special or particular relation
should not be left to the parties or witnesses or even courts so that subjectivity would be
minimized. Example of legally recognized special relationship is husband-wife, patient-doctor
client-lawyer citizen-government. For example if any of the municipalities in Ethiopia lies to
those to who buy condominiums the purchaser may invalidate the contract because of false
statement.
B) Such special relationship led the mistaken party to believe the statements of the
other party. False statement made by third party to the contract cannot be the cause of
invalidation of contract.
Defect in Consent due to Threat (Art.1706-1709). A person may be threatened physically or
psychologically to make an offer or to accept an offer made to him. In such case the person is
declaring his intention to be bound as an alternative means of avoiding the effect of the
threat. In principle parties enter into a contract for purpose of deriving economic benefit but
in case of threat, both or at least one of the party is entering into a contract to avoid a
possible risk that has been directed against him, his relative, his property interest. So had it
not been for the threat, the person would not have declared to be bound i.e. intention to be
bound is lacking.
Duress (Art.1706 1707) Duress is warning the party that unless he enters into a certain
contract certain harm will be done to him. One can raise duress as a cause of invalidation of
contract if the following conditions are cumulatively fulfilled.
1. There is a threat or warning to cause harm. The person must be told expressly that he
has to choose either suffering the certain harm or entering into a contract. He should not
Page 26
infer the threat of harm from the behavior or identity of the parties. For example, if
three shifta or gangsters come at a home of certain rich man and remained in seat for an
hour without giving any instruction to him he cannot claim duress if he writes them a
check of 500,000 birr and made them to leave his house.
2. The harm is on the person himself, spouses or his ascendant or descendants. The
existence of threat cannot be a ground of invalidation of a contract unless it is directed on
the party himself or his spouse or his ascendants and descendant. If the threat is on
collaterals such as brothers, sisters, it cannot be a cause of invalidation.
3. The harm is on person, life, property, and honor. Harm on person is when the threat is
to cause bodily damage to any of the above stated person. For example, a gangster come
to A’s house and made the following statement. “Mr. A, you shall either sign me a check
of birr 200,000 or I am going to cut the breast of your daughter”. Harm to a life is when
the threat is to kill any of the above persons. Harm to honor is when the threat is to
commit a certain act that negatively affects the reputation or public image of any of the
above person i.e. threatening to release information which the threatened person wants
to keep secret. For example, Abebe asked Shewakena, his friend, for a loan of birr
200,000. When Shewakena refused. Abebe told him that he (Abebe) will tell to
Shewakena’s colleague that Shewakena is eunuchs. Ethiopian law recognizes duress on
property. However, care should be taken in case the threat is to harm property. Since
here the choice of the party is making choice between similar interests; the person is
ordered to enter into contract (Property interest) or loss certain property. The threat on
property should be penal offences; a threat to break any contractual obligation should not
be taken as duress.
E.g. Asfaw, a ringleader, warned Belay to make an offer to sale his house in Dire Dawa to
Asfaw’s brother, Dingamo; or else the house is to be burnt.
4. The party believes that the harm will happen if he does not consent to the contract.
That means the party would not have entered into the contract had it not been for the
threat. Whether or not there existed duress depends on the subjective mentality of a
party. Therefore; it is enough if the threat is apparent to a party, although there was no
real threat. For example the fact that the pistol used to threaten a party was artificial
does not matter; it is enough if he believed that the pistol was the true one.
5. The threat should be serious: - the threat is said to be serious when the harm to be
caused is greater than the obligation that a party enters into. For example, a simple
kissing on a lip or slap on a face are not serious harms.
6. The harm is imminent that is the harm is going to happen soon and a party does not have
time to think of another option to avoid the happening of the harm except by consenting
to the contract. For example, if a lady receives a letter that warns her to sign a contract
or face rape. Such threat is not immanent. The person or property threatened should be
under the control of the threatening party and the threatening party will cause the
damage at the moment a party refuses to consent.
E.g.1 three gangsters came to Shura’s house and put him and his wife under control and order
Shura to sign contract of donation to legally registered political party under the pain of
having his wife raped by them.
Page 27
E.g.2 Abesha and Belete kidnapped Zerihuin’s daughter, and made a telephone call to him
that he either make an offer to sell his share in Access Bank or they will rape his daughter
7. The threat must impress a reasonable person. The law does not expect a citizen to be a
hero who can have courage to resist any threat. The law also does not want us to be
cowardice. Citizen should have some courage to resist some threats. So the law punishes
cowardice by denying the opportunity to invalidate contracts if the threat was such that
any ordinary person would have resisted it. For example, the law does not accept a
healthy man of 35 to claim that he was threatened by a young girl of 12. In determining
the cowardliness, the court should take into account the health, sex, age and position of
the person threatened and threatening. Normally, males may be expected to defend
themselves better than women. Adults are also expected to defend themselves when
compare to a person of early 20’s or late seventies. Moreover; health, education and
other psychological factors are also important to determine whether or not the person
was cowardice or had reason for failure to resist the threat.
Duress by third Party (Art.1707) Duress may be committed by contracting party or third
party to the contract. The right of a party to claim invalidation is absolute i.e. he can claim
invalidation no matter who threatened him to enter into a contract (Art 1707 (1). Moreover;
the other party cannot raise his unawareness of the duress as a justification to avoid
invalidation. Such justification may, however; be a ground to claim damage from a party who
got the contract invalidated (Art 1707 (2). For example, if Letamo went to Sisay’s house and
pointed a gun at his daughter’s front head and said “Ato Sisay make a call to my brother
Shumete and offer him the sale of your business for birr 500,000 or else I am going to change
your daughter into corpse”. Being threatened by the statement Sisay made calls and made an
offer to Shumete and Shumete happily accepted the offer. Sisay can claim invalidation of the
contract without being required to prove the knowledge of Shumete about the threat. But
Shumete may claim damage caused to him due to such invalidation. This is one of the
differences between duress and fraud. (See Art 1704(2)
A Threat to Exercise a Right (Art 1708) Under Art 1706 physical violence is used as a means
to compel a person to enter into contract. But under 1708, right is used as a means to compel
a person to enter into a contract i.e. a person is made to choose either to perform/undergo
certain legal obligation or to enter into a contract.
E.g. Abebe entered into a construction contract with Welchafo. In the contract, Abebe agreed
to complete the G+1 of Welchafo within six months. The contract further provides that if
Abebe fails to complete the construction, he pays 25,000 as penalty and the contract be
cancelled. Abebe failed to complete the construction and Welchafo warned him that Abebe
shall either agree to construct a fence of a building for free or Welchafo cancels contract and
claim the payment of the stated penalty. Abebe agreed to construct the fence.
In the above example, Abebe has been forced to make a choice between paying penalty and
constructing the fence for free but it is very difficult to conclude that he was forced. Life is
always full of alternative forcing us to choose one and lose the other. In a word of
economists, everything has an opportunity cost. Hence such type of choice is normal
especially in a free market economy. A person may use his rights to derive excessive
advantage but even in such case it is very difficult to invalidate the contract since a right is a
Page 28
bargaining power. However; if the right is used abusively and unfairly by taking advantage of
the want of the other party the concept of lesion (Art 1710(2) or law of unfair trade practice
may be applied.
Notice that Art. 1708 applies when someone has a right and uses it to obtain a proprietary
interest in excess of what he deserves. However; the threat may be directed against the
person from whom the threatening person does not have any right. For example, B. borrowed
birr 10,000 from Dashen Bank but failed to pay on time. The manager of the bank wrote a
letter to B’s brother, L that court action is to be taken against B unless L guarantees the
debt. For fear of the court action against his sister, L entered into contract of guarantee with
the Bank.
Where a person threatens to violate a law or his obligation Art.1708 does not apply. For
example, an employer threatens his employee to terminate the employment contract
unlawfully unless the employee agrees to work in another locality than the place his contract
provides. However, one may argue that if law invalidates a contract for abusive use of right
for a stronger reason it would invalidate the contract entered into to avoid violation of one’s
own right. So Art.1708 may also apply in case of threat to violate another person’s right.
However such interpretation goes against the meaning of Art 1706. So the best thing to do is
to repeal Art. 1708 so that matters not governed by Art 1706 be governed by Art 1710.
Reverential fear (Art 1709):- this is a psychological threat. The threatening person is playing
against the psychological (mental) feeling of the threatened person. It is a psychological
intimidation that if the person does not give his consent to be bound by the contract he will
be belittled by some one or the public in general. It is in short the fear of opinions.
Reverential fear is also called undue influence (see Art. 868 civil code). Under common law,
undue influence includes playing on victim’s superstitions for example; if a person make
donation because witch told him that unless he make, such donation his daughter dies.
However; Ethiopian law does not accept superstitious threat as a reverential fear. Under
Ethiopian law the fear is limited to the opinion of ascendants or superior whose opinion can
have observable and direct consequence on the future interest of the threatened person (Art
1709). For example, if an ascendant has bad opinion he/she may significantly reduce the
share of the person in succession and may also stop or reduce any financial support she/he
has been making. The superior may also under evaluate the subordinate which may have a
consequence on promotion or scholarship. However; the mere existence of reverential fear of
ascendant or superior is not enough to invalidate the contract. The reverential fear must
make the person to lose certain advantages i.e. his bargaining power was reduced; he was not
free to bargain properly so that the other contracting party get excessive advantage from the
contract. For example, Abebe bought a car from Challa for birr 200,000 but his boss, Bula
offered Abebe birr 205,000 Abebe accepted the offer although he did not want to sell the car.
So even if a person enters into a contract which he did not want, he must prove financial loss
to invalidate contract on the basis of reverential fear.
Proving financial loss is not yet enough. That financial loss must go to the benefit of the
person who is the source of reverential fear. In short only contracts entered into with
superior/ascendant can be invalidated on basis of reverential fear provided such
ascendants/superior derived excessive advantage. Whether the advantage is excessive or not
should be determined case by case by taking into account the economic position of both
Page 29
parties. Reverential fear is presumed. The ascendant/superior need not expressly state the
opinion he will have if the descendent/subordinate fails to agree. The fact that
superior/ascendant made an offer is enough to prove the existence of undue influence. The
offeree should be presumed that he entered into such substantially disadvantageous contract
because of reverential fear. However; the superior/ascendant can disprove such presumption
by any means.
Defect in Consent Due to Lesion (Art 1710)

Contract depends on the concept of free market economy where the parties can freely
determine their obligation. Parties are bargaining at arm’s length. This presupposes that
both parties to a contract are equal. However, such equality may be affected by individual
want, simplicity and business inexperience thereby giving the other party the opportunity to
exploit such weakness. The following is taken from George Krzeczunowicz, Formation and
Effects of Contracts in Ethiopian Law, 1983 P. 52-55)
iii. Objects of Contracts (Art 1711-1718)
Object of a contract is what parties have actually agreed to undertake. It is the obligation of
both parties to the contract. The obligation may be to do something or to refrain from doing
something or to give something to someone. So, object of a contract is the agreement of the
parties to act, not to act, or to give. The object of employment contract, for example, is the
employers’ agreement to pay wage and employees’ agreement to do certain thing. In
contract of sale of house; the obligation of the seller is to transfer ownership and possession
to the buyer and the obligation of the buyer is to pay price. Object of contract differs from
subject matter of contract. For example, in the above case, the work and the house are
subjects of the contract. Moreover; object of contract differs from penalty causes of
contract. Penalty causes provide a remedy or solution if a party fails to carry out his
obligation (see Art. 1886-1895 of civil code). A combination of object and penalty causes gives
us content of the contract.
Freedom of Contract
As stated under Art 1679, parties are the ones who define the content of their contract. They
are free to determine what each party is bound to perform, where and when to perform and
may also specify penalty for nonperformance. They are free to enter into any type of
obligation, obligation to do “not to do” or “to give” (Art 1712(1). Obligation “to give” or “not
to do” is clear enough; one can clearly know what the other party gives or retrains from
doing. Subjectivity of a party to a contract is less visible. But in case of obligation to do the
personal nature of the person who agrees to do” matter very much on the benefit that the
other party derives from the contract. For example, A agreed not to fence” his land (not to
do”) and B agrees to sell his cow and C agrees to teach law of contract. In case of “not to do”
or “to give” whosoever and in whatsoever he performs the contract, the benefit of the other
party is the same. But in case of obligation to do the qualification and the diligence of the
doer has great effect on the quality of the work. So in case of obligation “to do” parties
should determine the criteria of evaluating the quality of the work done (Art 1712 (2).
However; parties may fail to specify all the possible contents of the contract. It is practically
impossible to imagine all the possible disputes that may arise between parties. The best way
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to fill such gaps is to follow the golden rule of “do unto others what you want others do
unto you”. (Art 1713). Accordingly; parties are presumed to have agreed to benefit from the
contract fairly and equitably. So for disputes that are not clearly settled in the contract,
court could refer to good faith, equity and custom and law. For example, in a certain case, a
College employed Mr. X as a mathematics teacher. Later the college wants to make Mr. X an
academic dean. When the instructor refused to take the position the college dismissed him
and the instructor instituted court action; the college was defending on the ground that it is
customary for instructor to take position in academic administration and won the case.
Generally parties should expressly and clearly define content of contract. On any matter
which parties did not expressly agree, they are presumed to have left the matter to be
governed by law, custom, equity and good faith. So, in order to settle disputes court should
first refer to contractual provision and if they are found to be insufficient, then to legal
provisions and if still the matter is not resolved, to customs and at the end good faith and
equity be applied.
However; law, custom, equity and good faith merely supplements the contract. If there is no
contract, law, custom, equity cannot by themselves create contract (Art 1704 (1). Therefore,
parties must at least indicate the main obligation. One must be able to understand the object
of the contract by referring to the contract itself without referring to law custom, equity or
good faith (Art 1714(2) i.e. before going to interpret the contract, the court should be able to
speak of at least the obligation of one parties by referring to the agreement of the parties
only. For example, in a sale contract, the court should at least know obligation of a seller and
then it can refer to the law to determine its price (See Art 2305-2307). So contract is
interpreted only if it is sufficiently clear so that such sufficiency be completed.
Limitations to Freedom of Contract However, parties’ freedom of contract is not absolute

(Art 1711). No freedom on earth is absolute. Human being is a social animal where the
absolute freedom of one necessarily violates freedom of another. A contractual freedom is
limited to attain social justice, peace and tranquility. The major causes for limitation of
freedom of contract are:
a) Social protection: Freedom of contract at the end of 19 th century was seen as a center
of the exploitation of the proletariat. The labor force was large due to rural-urban
migration and the capitalists were few. There was severe exploitation of the poor laborer
by big capitalist. Such exploitation led to the development of Marxist theory which in
turn led to the establishment of international labor organization in 1919. Moreover;
exploitation of the tenants by the land owners was also the centre of discussion. So laws
were begun to be issue prohibiting certain types of contract and imposing terms into
contract. This process also continued right through twentieth century. Thus there has
developed a whole network of institutions designed to act as a safety net for individuals,
to protect them from extremes of commercial and industrial life. Such system includes
national insurance, National Health Service statutory recognition of trade unions, and
Compensation scheme for those made redundant and a whole battery of legislation to
protect tenant from the excess of land lords. Some communist countries even went to
the extent of reducing freedom of contract to nil. For example, the Ethiopian revolution
of 1974 brought about nationalization of private properties and land there by in effect
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abolition freedom of contract. Freedom of contract is less relevant without freedom of

property.
b) Consumer protection: There has also been recognition of the danger of concentration of
economic power. Hence, restrictions on the growth of monopoly power such as market
segmentation and quota has begun to be prohibited. Moreover, the mass production of
industrial revolution brought about freedom of choice and goods of complexity which
could not be known to an ordinary person. So legislators began to impose conditions on
the parties to contract. Specially, sellers of goods were required to comply with certain
basic standards.
c) Public order or morality: - under the guise of freedom of contract parties are not
allowed to go against the public order and morality.
Generally, under Ethiopian law; freedom of contract is limited by the following:
a) Clarity of objects (Art 1714) as stated in our earlier discussion; the object of a contract
should be sufficiently clear; otherwise the court concludes as though parties did not
exercise freedom of contract. Clarity of object is therefore; not limitation of freedom of
contract rather it is parties failure to exercise freedom of contract.
b) Possibility of object (Art 1715). Parties’ freedom does not allow them to bind themselves
to perform humanly impossible things. The law wants to protect the public from
superstitious believe. For example, if a person agrees to raise a dead body; to duplicate
money by mystery, to bring audio visual image of dead body; to make a person very rich
etc the object of the contract is impossible. Impossible obligation is the obligation whose
performance is beyond the nature of human being. For example, a certain Ethiopian
peasant may agree to cure HIV/AIDS. Such is currently impossible for human being.
However, if the peasant agrees to invent HIV/AIDS drug although such is relatively
difficult for Ethiopian peasant; inventing a drug is something within the limit of human
nature.
c) Legality of the object (Art 1716(1) no person can be bound by contract to violate any law
of the country since such is contradiction in terms. For example, if a person is forbidden
to commit abduction, it is illogical to allow a person to bind himself by a contract to
abduct someone or help another person in committing abduction. So nobody can bind
himself to violate criminal law of the country.
N.B restriction and prohibitions indicated under Art 1711 differ from legality of object.
Restrictions and prohibition indicate the concept of social and customer protection whereas
legality indicates concept of public order. Restrictions and prohibitions are mainly found in
labor law and trade practice law. They are also found in commercial code and civil code.
Limitation on exercise of constitutional rights (Art.9 (2), 12(3), 16(3), 17, and18), excluding
extra contractual liability (Art, 2147), revocation of authority (Art.2183), commissoria lex
(Art.2851, 3060), issuer’s guarantee of payment of negotiable instrument (Art.743 comm.
code) are some of the examples of restrictions and prohibitions. Restrictions and prohibitions
are intended to protect the individual contracting party whereas legality is intended to
protect the public. So legality of the object is determined by referring to criminal law
whereas restrictions and prohibitions are to be found in the private law area.
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d) Morality of Object (Art.1716 (1) Society wants to perpetuate itself. For the society to
perpetuate, individual members of the society have to have certain standard of conduct
generally known as morality. Otherwise, individuals consume one another thereby bringing an
end to the society. As a means of self-defense the society punishes those who violate
morality. Law is the part of morality that is entrusted by the society for its enforcement. The
remaining part of morality is to be enforced by the society itself by means of public opinion.
However; even though the state does not have a duty to enforce such morality it should
refrain from indirectly assisting the violation of morality. Therefore any immoral obligation
cannot be enforced by court or executive (Art.1716 (1). The obligation may not be contrary
to criminal but it may be contrary to morality. For example, if a man agrees to pay money to
get sexual gratification from a woman such contract is not illegal but immoral. So the man or
the woman cannot get state assistance to have the contract performed.
E.g. Abebe, a resident of Addis Ababa, agreed with Belete that Abebe eats donkey’s meat in
the presence of friends and Belete agrees to pay 5000 birr. Abebe did what he agreed to do
but Belete refused to pay and Abebe begs the court that Belete be forced to pay the agreed
money.
Motives of the Parties. Parties are expected to know content of their contract only (Art
1679). A party is not bound by restriction or reservation of the other party. If a party cannot
be bound by restrictions and reservations of another party, equally he should not benefit from
such restrictions and reservations. Moreover; motives are mostly hidden agenda of parties
and knowing these motives is very difficult. In such situation allowing a part to avoid his
obligation is therefore, allowing him to interfere in the private life of another contracting
party in search of information and evidence necessary to prove such motive. Furthermore;
motive is a mental element and everybody has a freedom of thought. Freedom of thought is
the only absolute constitutional right. Still further, there is no clear indication that the
motive will be carried on into practice; there is high possibility that the person may himself
drop his bad motive. Even though we may argue that entering into a contract is a preparatory
act, preparatory act is a crime only in an exceptional cases and in such case the act
(obligation) will be illegal since it amounts to assisting the commission of the crime(the
preparatory act). Therefore motivate of the parties are irrelevant to determine the legality
or morality of the object (Art 1717).
E.g.1 Cain is butter dealer. He bought many kilograms of banana from Enoch and agreed that
delivery and payment be on April 20, Enoch came to know that Cain wanted the bananas to
mix it up with butter and sell it to the public. Enoch cannot refuse to perform the contract.
E.g.2 Saul agreed to lease his houses to Satnael for birr 1200 per month. They agreed that the
contract remain effective for 12 months. Saul later on came to know that Satnael has planned
to use the house as a head quarter for terrorist activities in East Africa. Saul cannot claim the
invalidation of contract. The only option he has is to inform the case to police.
However; if the illegal or immoral motives of a party is understandable from the content of
the contract itself i.e., the illegal criminal motive is indicated as one of the content of the
contract, such contract may not be enforced although it has nothing to do with the objects of
contract. For example, the illegal or immoral motives of a party may be indicated in the
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introductory (preamble) part of the contract or it may even be mentioned in the main body
without having binding nature.
E.g.1 “Me, Abebe, agree to lend birr 10,000 for Alebachew. Incidentally I wish him the best in
his business so that he may appreciate my effort to assist him. I know that contraband
business is a risky business. May God help him.”
“Me Alebachew, appreciate the loan. May God help me to make favor to Ato Abebe”.
Notice that Art 1718 (1) never talks about invalidation. The courts never invalidate a contract
even if the illegal or immoral motive is clear from the contract itself. What the court should
rather do is to refuse to enforce it. The court neither enforces nor invalidates the contract,
the court becomes neutral towards the contract, and court rejects both claims for
invalidation and enforcements of the contract. Courts refusal to invalidate does have legal
effect since there would not be reinstatement so the court never touchs what has already
been performed and never help the completion of performance (Art. 1815). Art 1718 (1)
applies to both written and oral contracts. In the case of oral contract, the content of
contract which indicates the illegal/immoral motive of a party is proved from words of a
witness brought either by the plaintiff or defendant. For example a plaintiff witness may
testify as follows. “I know that the defendant agreed to lend birr 20,000 which the plaintiff
intended to use as down payable to parents of children who he intended to take to Addis
Ababa.” Moreover; the admission of illegal or immoral motives as a content of the contract
by the party claiming performance can also be indication of the content.
Finally, if the immorality/illegality of motive is not included in the content of contract such
immoral illegal motives cannot be proved by any other means except by a written document
presented by party claiming performance. A defendant or even the plaintiff cannot employ
oral witness to prove motive that has not been content of the contract. In oral contract if the
immoral/ illegal motives was known to both parties at the time of conclusion of contract we
can say that it was made content of a contract, otherwise it was not a content of the
contract. It is less likely for a court to refuse performance on the basis of motive which was
not made content of a contract since such motive is to be proved by document presented by a
party claiming performance. In normal circumstances the party claiming performance
(plaintiff) cannot prove the existence of illegal motive since such is defeating him. More
surprisingly, he himself has to prove by written document there by reducing the possibility of
obtaining evidence from the plaintiff. Although there may be a possibly that hostile witnesses
may be presented by plaintiff but there is little possibility for plaintiff to present hostile
documentary evidences. Finally the writers are of the opinion that Art 1716 (2) seems to
overlap with Art 1718(1). This might be because Art 1718(2) was introduced by drafting
commission with out the knowledge of the drafter and the commission might have not noticed
the relationship between the two articles. Let us try to see the similarity of the two articles
by examining examples given by G. Krzeczunowicz and Rene David.
Eg.1 Abebe agrees to pay birr 5000 for Melaku if he resigns from the judgeship which he is
currently occupying. Here; we can clearly see the motive of the parties i.e. using one’s own
public position for financial gain and removing peoples from office by using one’s own
financial power. This motive is illegal or at least immoral.
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Eg.2 A parent agrees to pay birr 25000 so that the kidnapper releases a child. Here also the
kidnapper’s motive of using his illegal act as a means of earning money is clear from the
contract.
Eg.3 a reward offered for recovery of stolen good by the thief and accomplice is also the
same.
E.g.4 A undertakes to pay B a sum of money in order that B not commits a crime. Here also
the motive of B is to get money by threatening A to violate a law.
Finally, the writers are of the opinion that any threat that does not fulfill the criteria of
duress under Art. 1706 may be evaluated against the criteria of 1716 (2). However, Art 1706 is
about defect in consent whereby a person sacrifies his freedom not to contract; he was bound
by force to enter into a contract. Such a person is a reasonable person and the society never
condemns him for doing so. He may even be condemned if he refused to enter into a contract
and as a result the threatened harm materializes. For example, what if a person leaves his
daughter to death for not signing a check of 10,000 for the murderers? However, a person
under Art 1716(2) has another alternative to save his right. A citizen has a moral duty not to
cooperate with wrong doer and must even fight them by using all possible legal mechanism.
Failure to do so may amount to immorality. Even more doing any act that may encourage the
wrong doers to continue with their act is immoral. For example, a person should not
negotiate with thief to get stolen property back. If a person does this it is very difficult to
argue that he was bound to enter in to contract. Rather, such a person is selfish and always
gives priority to his own short sighted interest without giving any attention to the public
interest. Hence under Art 1716(2) there is no defect in consent but the motive of one or both
of the parties is illegal/ immoral. Generally, Art.1716 (2) applies to cases where one or both
of the parties are intending to benefit from their own immoral or illegal act. For example, A,
friend of B agrees to sell his house to B for birr 200.00 which is by 30% less than its actual
price so that B would not rape the daughter of D who burnt his (B) house. D’S daughter was
under B’s custody.
Form of Contracts (Art 1719 – 1730)
It is the way in which the content of the contract exists or appears to others. It answers the
question as to how third parties such as court could know the agreement of parties.
Therefore, contract may exist either in written form or oral form. When contract is in written
form, a court or third parties know the agreement by reading a paper on which it was written
(Art 2003). Otherwise, the court can know the agreement of parties from oral testimony of
the parties themselves or witnesses (Art 2002). In an case offer and acceptance was given
orally, by conduct or by sign and not reduced into writing the contract is said to be made
orally since it is to be proved by oral witnesses. Moreover, when part of the agreement is
written while the remaining is unwritten, such contract should be taken as oral form and the
written part could only be used as corroborative evidence to oral testimony.
Freedom of Form (Art 1719)

Most non-lawyers believe that for a contract to be legally binding, it must be made in writing
and signed at least by the parties to contract. But these people forget that they have entered
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into so many contracts in their life without following written forms. However, the law gives
freedom to the parties to choose either written or form. So contract can be valid if consent,
object and capacity requirements are fulfilled.
Limitation on Freedom of Form Art.1719 (2, 3)
Freedom of form is not absolute. The freedom may be limited by law or the offeror. An
offerer has a freedom to determine the form of acceptance (Art 1681 (2). Similarly he can
propose written form. If the written form is accepted then parties agree to limit their
freedom of form (Art. 1719(3). If the written form is rejected then the offer itself is rejected
(Art 1694). Limitation of freedom of form means denying the parties the option to make their
contract orally.
The reason for such limitation may be;
Evidentiary value: Sometimes we may feel insecure when we make contracts orally especially
when the contract involves considerable property interest. The insecurity is not unreasonable
since we may be in a very difficult position to get witness to prove the contract if a person
with whom we enter into contract denies the contract. The insecurity is further exacerbated
by high mobility of people. This creates shortage of information to properly know the
personality of the individual we are contracting with. The disintegration of social life also
contributes to our insecurity since there is less possibility to use public opinion to punish the
people who dishonor his words. So to reduce such insecurity people may prefer to make their
contract in written form. Recalling content of contract: There is an Amharic saying “things in
mind can be forgotten; things in writing can be recalled.” This means if contract is in oral
form, there is high possibility that its content be forgotten both by parties and witnesses
specially when the content of a contract is a complex one and remains effective for a
relatively longer period. For example, contract of marriage is mainly justified on this basis
since spouse dishonor his words rarely but most of the time he/she forgets the promise
he/she has made to a partner before marriage. Contract of marriage made in writing
therefore, helps spouses to recall their lovely promises.
Indication of intention to create legal relation: If a contract is made in writing, there remains
little doubt that there was no intention to be bound. If a contract is to be made in writing, a
party thinks twice before he gives his final consent to be bound. Firstly, the person thinks to
give consent and secondly he thinks when he is required to sign the written document.
Between the consent and signature, there is a time gap. Ouring such time gap, whatever its
length, the person can get a chance to thoroughly think and decide to change or affirm his
previous decision. Moreover, when one party proposes written form the other party may
understand that the contract is being taken seriously by proposer of the form. Generally,
written form makes parties to be conscious of the effect of the contract. So, written form
may be taken as an indication of intention to create legal relation.
Contracts made in Written Form (Art 1721 – 1726)
The following contract shall be made in writing.
A/ contracts required by the law to be made in writing
Some of the contracts that the law expressly requires to be made in writing are:
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Contract relating to immovable: - all contracts that affect a right on an immovable except
lease must be made in writing. Therefore, sale, usufruct, servitude, mortgage, antichresis
partition, compromise and even arbitration agreement concerning house or land should be
made in writing. For example, if heirs partition an immovable among themselves, such
partition agreement must be made in writing. Moreover; if disputants on an immovable want
to refer such dispute to arbitrations, they have to make their agreement in writing (Art 3326).
Notice, however; that lease or rent relating to immovable need not be made in writing. In a
case Rented Houses Administration Agency vs.Sosina Asfaw in a file No15992 presented on
Hamle 19, 1997 to it the Federal Supreme Court Cassation Division ruled that renting house
need not be made in writing. The fact of this case was that the appellant sued the respondent
in Federal First Instance Court for birr 234,576.57 of house rent arrears. The respondent
argued before that court that the house rent contract was void since it was not made in
writing. The court accepted the argument and the appellant appealed Federal High Court
where the appeal was rejected. Then the appellant went for cassation and finally got a
decision that house rent contract need not be made in writing.
Contract with public administration (Art 1724): Any contract to which a government agency is
a party, including any type of employment contract, should be made in writing. In public
administration, officials do not stay in office indefinitely rather they may leave their office by
election, removal or resignation. Once they leave their office it is difficult to ascertain the
content of the contract entered into during their stay in office but that continues to be
effective even after they leave their office. Moreover, oral contract opens a room for
corruption since keeping information is difficult.
- Contract of guarantee (Art 1725 (a)
- Contract of insurance (Art 1725 (b)
- Contract of marriage
- Partnership contract
- Pledge for a loan exceeding 500 birr (Art 2828 (2)
- Sale and mortgage of business (Art 152, 177 (2) comm. code)
- Promise of sale and preemptions (Art 1412)
- Agreement prohibiting assignment or attachment of a certain this (Art 1430)
B/ contracts required to be made in writing by the parties
Even if the law has not expressly provided written form as a mandatory requirement for
validity of contract, parties may themselves provide written form. Once the parties agree to
make their contract in writing, then contract will not be completed until such form is
fulfilled. (Art 1726). No party can require the performance of the contract until it is made in
writing. Even if the parties have begun to perform the contract, the court does not help them
to have the performance completed unless they comply with their prior agreement to make
the contract in writing. This means parties cannot change their prior agreement impliedly by
performing the contract. This is probably because the prior agreement has been made
expressly either in writing or orally and parties should not be presumed to have an intention
to extinguish such express agreement by conduct (implied agreement). In short express
agreements cannot be changed by implied agreement. However, parties can change any
express agreement by another express agreement. So, any agreement to be a contract in
writing may be changed in a manner it was made. If the agreement was made in writing its
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change should also be made in writing (Art. 1722). Similarly express oral agreement should
also be changed by another express oral agreement or written agreement. Therefore, if one
of the parties proves that they have expressly changed their agreement to make their
contract in writing, they should not be required to stick to their original agreement and they
can make contract in oral form. For example, C and D agreed that C will prepare a teaching
material on Ethiopian constitutional law and D pays birr 30,000 upon completion of the work
and they further agreed that the content of the contract shall be written down in detail on
April 20. On April 25 C and D meet and agreed that the contract is effective without any need
of written form.
C. Preliminary contract (Art 1721)
A contract that intends to lead to another contract shall be made in writing if the contract to
which it leads is required to be made in writing either by the law or the parties. The best
example is agency contract. If the agent’s power is to enter into a contract in writing he
should be conferred with such power in writing (Art 2200(1). The other example, provided by
Rene David and G.Krzeczunowicz (David .p. 28, G.Krzeczunowicz P.73.) is promise of sale of a
house which is also governed under Art 1412. The other possible contract the writers are able
to imagine is an agreement to enter into compromise provided the parties agree to make the
compromise in writing. However, an agreement to enter into compromise is not binding since
compromise itself is a contract and a party may refuse to make a compromise although he
may claim that he is ready for compromise (1879 (1) cum. 3307). If Art. 1721 was intended to
cover case of agency and promise of sale, it becomes redundant because agency and promise
of sale are expressly stated under special provisions to be made in writing (see Art 2200 (2)
1412). So, the relevance of Art.1721 remains obscure.
D/ Variation of contract made in writing (Art 1722)
Variation of contract is a contract itself (Art. 1675). So, if such contract relates to contracts
indicated under Art. 1723, 1724 and 1725, it should necessarily be made in writing. However,
in case of a contract made in writing by parties’ agreement, parties and courts may feel that
such contract can be varied by any form. To guard against such possible interpretation, the
law expressly provides that variation of a contract made in writing shall be made in writing.
For example, C and D entered into lease contract in writing. In their contract they agreed
that the contract begins to be effective from April 20 and any party who fail to meet his
obligation shall pay birr 10,000 as penalty after the contract was concluded. C made a
telephone call to D and proposed that effective date be on May 20 and D accepted the
variation. No variation is made.
N.B The law provides form for creation and variation of a contract but it is silent about form
for extinguishing a contract. The drafter also expressly states that provisions dealing with
form of contract do not include extinction of contract (David.p.28). He rather claims that the
formality requirements of extinction of contract are provided under chapter dealing
extinction of obligation (David. 28). Here the drafter must have been mistaken since the
above stated chapter has nothing to do with formal requirements (forms of extinction of
contract) rather it governs causes of extinction of contract (Art 1807). Even in case of
remission of debt and novation (contractual causes of extinction of contract) the law never
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provides the form of remission or/and novation of contractual debt. What is provided is that
remission and novation are contractual causes of extinction of contract (Art. 1825, 1226). The
same mistake must have also been committed by G.Krzeczunowicz since he also claims that
extinction is covered under the chapter referred to by David. However, these writers are of
the opinion that when parties intend to extinguish contractual obligation that exists between
them, they shall make the extinguishing contract in special form if the contract to be
extinguished was made in special form. This is because;
Extinction of contract is a contract itself- When we say contract we mean either creation or
variation or extinction of obligation. So, when the law provides that contract with
government be made in writing, it includes extinction since extinction is a contract. The same
logic, therefore, applies to all other contracts which the law requires to be made in writing.
For example, C and D entered into a sale contract the sale contract provides that C seller
shall sell his house to D and D shall pay birr 20,000. C and D can extinguish such contract if
they want since everybody has a freedom to contract (extinguishing, creating, or variation of
obligation). However, they have to make their contract in writing since contracts relating to
sale of house should be made in writing.
Intention to create legal relation can be clear. If parties agree to extinguish written
contract orally and the other party later on claims that he did not intend the agreement to
create legal effect, his argument may be acceptable. As we stated in our discussion on
justification for written form, in case of written form, a person thinks twice before he binds
himself. If he thinks twice to create an obligation he should also be given the same chance to
extinguish such obligation. That is why Art. 1726 provides that agreement to make a contract
in writing shall not be changed by implied declaration of consent (conduct). So a person
should be presumed to have changed his previous stand only when he uses the same way of
declaration of intention as he used earlier.
Probatory value of written instrument (Art. 2005) A written instrument is a conclusive

evidence to prove obligation. It cannot be challenged by witnesses except by the oath of the
defendant (Art. 2006 (1). Therefore, it is very difficult to prove that a written contract has
been extinguished by a later oral contract. This means a remission or novation of contractual
obligation should be made in writing if the obligation to be remitted or novated arose from
written contract.
Effects of form (Art. 1720)
When the parties or the law requires the contract to be made in writing, failure to comply
with such requirement make the contract a mere draft (Art. 1720). The contract never exists
until the formality requirement is fulfilled. As can be understood from Art.1726 and the
phrase “a mere draft” (Art. 1720(1), the parties can complete the contract at any time by
putting down its content in writing. But until such formality is fulfilled, no party can claim
the enforcement of the contract. However, failure to pay stamp duty or registration fee never
affects the effect of the contract (Art. 1720(1). The person can pay such stamp duty or
registration fee at any time and claim the enforcement of the court. Paying stamp duty or
registration fee is as easy as fueling a car and a car which does not have any mechanical
problem can immediately give the service intended once fueled. So form is like a mechanical
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problem of a car that needs the assistance of mechanic but stump duty and registration fee is
like a fuel that needs money only.
Some contracts need to be registered. Such registration is normally intended to make third
parties to be aware of the existence of such contract. Registration may also be intended to
have deposited documents in a relevant place. Therefore, such registration does not have any
relationship with form of the contract. That means even if the legal requirement of
registration has not been fulfilled, the contract can still be enforced between parties.
Registration can affect the validity of contract only when the law expressly states that failure
to register the contract shall make the contract non-existent (Art.1720 (3). For example,
although Art 1723 provides that contract relating to immovable be registered, it does not
state that failure to register shall make the contract non-existence. Therefore, according to
Art.1720 (3), contract relating to immovable remains valid even if the registration
requirement is not fulfilled. This is further clarified under Art 2877 and 2878 which govern
sale of immovable. The two provisions provide that failure to make the contract in writing
makes the contract nonexistence but failures to register the contract does not. The same
logic applies for contract of marriage and contract with government. However, it is expressly
provided that mortgage contract and partnership agreement do not produce any legal effect
if they are not registered (Art 3052 and art 177(2), Art 222 commercial code).
N.B. when the contract is to be made in writing it will not be binding until the written form is
fulfilled. This means, if contract is to be made in written form, offer and acceptance do not
have legal effect. One can withdraw one’s consent at any time. However, the person who
arbitrarily abandons his offer or acceptance may be extra contractually liable (Art. 2055).
Written form (Art 1727-1729)

Although in our discussions on page 46 we said that form of contract is either written form or
oral form, the law simply states “special form” without defining what it mean by special
form(see Art 1719 (2,3) 1720 1726 1721-1725). More over; there are forms other than
written form. Let us see the definition given by the law to a written form so that we may be
able to guess other forms that are imagined by the law.
A contract is said to be in writing where (Art. 1727)
 The content of a contract is written i.e. the content is readable.
 The writing is made on a special form. Special form means any pure paper that is
intended for a specific contract only. Therefore; if a paper contains another
contract or other things such paper is not a special document. Moreover; writing
on electronics does not fulfill the requirement of special document.
 Parties to the contract sign the special document. Parties sign by putting hand
written mark on the special document (Art 1728). Here, two things are interesting
firstly the law does not allow the use of mechanical process such as stamp;
secondly, thumb mark never binds unless it is made in the presence of notary,
registrar or a judge acting in discharge of his duty( Art-1728 (2)
 At least two persons sign the special document as witnesses.
The witnesses should have contractual capacity (Art.1729 (1) (Here Krzeczunowicz claims that
Art. 1729 and 1730 are redundant (see G. Krzeczunowicz P. 77-78). Although this writer
Page 40
agrees that art 1729 (2), and 1730 are superfluous Art 1729(1) is very much relevant and
gives guidelines whether or not minor and judicially interdicted persons can sign juridical acts
as a witness. Art 199 (3) forbids minors from entering in to juridical act that binds them.
Becoming a witness does not mean performing juridical act since witness cannot ever be
bound by mere fact of signing as a witness (Art 1730 (2). In short, written form for Ethiopian
contract law means any special document containing content of a contract signed by parties
to the contract and at least two witnesses.
Effects of Elements of Contract (Art, 1808-1818)
As discussed earlier, elements of contract are consent, object, capacity and form. Generally a
contract that misses any of these elements is either void or voidable. Void and voidable
contracts have differences and similarities. Let us first discuss the differences and then come
to similarities.
Difference between void and voidable contracts (Art, 1808-1814)
Definition: The deference between void and voidable contract emanate from the definition
given to each of them. Void contract is a contract which parties intend to produce binding
effect but does not actually have any legal effect. The obligation intended by the parties
does not exist from the beginning. So, it is called void abinitio. But voidable contract is a
contract that has begun to produce effect intended by the parties carrying with itself certain
birth defects that may destroy the effect it has produced. Void contract is like the sperm cell
meeting egg cell but unable to fertilize it. Parties made offer and acceptance but no
fertilization. A void able contract is like a defective pregnancy. In such case fertilization has
taken place and the embryo is growing but there is a possibility that the defect may lead to
abortion unless such defect is removed medically or by any other means. If there is no
fertilization the only option of the parties is to try the second chance but in case of defective
pregnancy medical assistance may be sought without any need to attempt the second chance.
Similarity, void contract cannot be cured but voidable contract may be cured by agreement of
both parties to the contract (Art.1811).
Cause: A contract is said to be void when the object or form element are missed. The object
is either immoral or unlawful/impossible or unclear. Or the special form required by the law
or the parties has not been complied with. In short a contract is void if any of the Art 1711-
1729 are violated (Art 1808 (2). But voidable contract is due to defect in consent or lack of
capacity (Art.1808 (1).
Invalidation is not claimed within two years. A party whose consent was vitiated loses his
right to invalidate the contract unless he brings court action within two years from the
moment he knew the fraud or mistake or from the moment the duress disappears (1810(1).
The right will be absolutely barred if he has been unable to know the existence of defect in
consent or the duress has not disappear with in ten years from date of conclusion of the
contract ( Art 1845: Tilahun P. 155). In case of lesion the period of two years begin to count
from date of conclusion of contract; not from the date a person knows the existence of
lesion ( Art 1810 (2). Notice that a contract affected by incapacity need to be invalidated
within two year from the date the person became capable (Art 1810 (1) Tilahun P. 155).
Page 41
B Contract is confirmed a person whose consent is vitiated may waive his right to demand
invalidation. Such waiver is a contract and has to be made in same form as the main contract
(Art 1811(2). Notice here that the Drafter Rene David must have not been aware of the
inclusion of Art 1811(2) in the civil code since he provided contrary to what is stated in the
law (David, p .74).
C The injury is made good. A contract vitiated by lesion remains valid if the party taking
undue benefit agrees to return such benefit (Art. 1812).
D. The vitiated provisions of the contract are avoided. Contract may be invalidated
partially provided the valid one is independent of the invalid one (Art 1813). This is like a
surgical operation on human or animal organ. Incidentally; if a contract contains both
lawful/moral and immoral/unlawful obligation, the immoral/unlawful obligation shall be
considered as if not written and the remaining should be give effect, provided it is clear and
meaningful. E.g. C and D agreed that D shall serve as a maid servant and she shall also make
herself ready for sexual intercourse twice a week with C and C shall pay birr 400 per month
( G. Krzeczunowicz P. 66) Here the part dealing with sexual intercourse should be
considered as if not written or ( does not exist).The fact that voidable contracts are
invalidated by the claim of the party affected by defect in consent or capacity may affect the
security of the other contracting party since he is not sure whether or not the affected person
will exercise his right of invalidation and if so, when he may claim invalidation. Art 1814
provides a solution to such insecure party so a party who does not have the right to invalidate
the contract can, however, have the right to know whether or not the other party claims
invalidation (Art. 1814 (1). If such party fails to respond within reasonable time the contract
is deemed to be invalidated (Art 1814 (2). Notice that the word “cancelled” in Art. 1814(2)
should be replaced by “invalidated”.
E.g. Abebe sold a bicycle to Solo, a boy of 14, in this example Abebe cannot claim the
invalidation of the contract but he can ask Solo’s tutor whether he intends to confirm or
invalidate the contract. If the tutor fails to give answer to Abebe, Abebe can presume the
failure as invalidation. Notice also that Art 1814 does not apply to void contract since void
contract cannot be invalidated.
Similarities between Void and Void able Contracts (Art 1815-1818)
As we have said void contract is devoid of any legal effect by its very nature and violable
contract is devoid of legal effect by court decision only. So the following are similarities of
void and voidable contract.
Unable to Produce Legal Effect on the Parties like void contract voidable contract is also
considered as void abolition once it is invalidated. Invalidation of voidable contract has a
retroactive effect thereby denying the contract to produce any obligation from the moment
of its inception. Contract is invalidated means the embryo is aborted. A mother who failed to
conceive and a woman who aborted the pregnancy are in effect equal, since both have not
borne a baby, and they have to try their second chance. Exactly the same is true for void and
voidable contract.
E.g. Abebe and Bekele entered into contract of sale of a house but did not make the contract
in writing. And Shemsu was threatened by Belay, because of such threat Shemsu sold his
Page 42
house to Bacha, the contract was made in writing and signed by both parties and two
witnesses. In both cases, the parties do not have obligation i.e. agreement is of no effect
provided the court has declared the contract between Shemsu and Bacha void.
Reinstatement (Art 1815-1818): Void contract and voidable contract that is invaliated do
not produce obligation but parties might have made payment believing that the contract was
valid i.e. such payment was made unduly or improperly. So a party who receives such undue
payment shall give it back. Such giving back is called reinstatement Art 1815 (2). A contract
was void or was made void does not mean that those who made undue payment will be
without remedy (Art 1815 (2).
Eg1. A sold a house to B for birr 300,000. and received the price but did not transfer
ownership to B. if A refuses to transfer ownership of the house to B on the ground that a
contract was not made in writing. he has to return the money he has received.
Eg. 2. Assume that C agreed to lend birr 350, 000 to D with interest at a rate of 12% per
annum but further provided that contract shall be made in writing. However, C gave the
money to D before the contract was made in writing. After a year C claims the payment of
the money back with interest. Here D can refuse to pay interest since the contract was void
but D has to pay back the 350.000 birr.
Obligation “to do” or “not to do”
In these two types of obligation, there is no transfer of ownership or holding. The contract
requires the parties to perform certain intellectual or physical (labor) activities that benefit
the other or to refrain from exercising certain property rights. So the concept of reinstating
the parties by returning the thing does not work since there was nothing delivered. However a
person can definitely lose certain economic advantage. For example A agreed to construct G
+2 of E for birr 200.000, A and E agreed that contract becomes binding when made in writing.
But A started construction by receiving all necessary construction materials from B. Before
the construction is completed, B informed A that the contract is void. In this case, A has to
stop construction but should be paid for the percentage he constructed. In short, acts done in
performance of contract shall not be invalidated where such invalidation is not possible (Art
1817)
Transformation of the thing: - The receiver may substantially change or alter the thing he
has received. In such case, returning the thing would involve serious disadvantage or
inconvenience (Art. 1817(2). For example, Abebe sold 500 quintals of cement to Shemsedin
for birr 100,000. Shemsedin received the cement and used it for construction. If Abebe got
the contract invalidated on the ground of defect in consent Shemsedin cannot return the
cement. Moreover, if the above construct is a sale of iron bar for construction and Shemsedin
took delivery of the iron bar and cut it into pieces making it ready for construction he cannot
return the iron bar since it is serious disadvantages to both Abebe and Shemsedin, Abebe may
be unable to get market and Shemsedin also made expense to cut the iron bar, Therefore,
where the thing is transformed, the receiver shall pay the price of the thing (Art 1817 (2).
Returning the thing is uneconomical: The thing may not have been transferred, damaged,
lost or transformed, but repayment expense may be high. In such case, the court should not
order the repayment of the thing. Rather, it should order payment of compensation. For
example, Mesobo Cement Factory sold 500 tons of cement to Hawassa Apartment P.L.C. The
cement was transported from Mekele to Hawassa. Declaring such delivery as of no effect is
Page 43
uneconomical to both seller and buyer. In short, if the contract is invalid, any performance
made on the basis of such contract becomes invalid. This means the receiver shall return the
thing he received (Art 1815). However, if returning is not possible for whatsoever reason, an
appropriate compensation shall be paid (Art 1817). Incidentally, this writer is of opinion that
Arts 1815-1818 can be said redundant since they deal with issues covered under unlawful
enrichment, especially under payment (Art 2162 – 2178). Such redundancy creates vagueness
on the meaning of void and voidable contract. Once the contract is invalid, any relation
between the parties is extra contractual and, therefore, Art 1815-1818 should be deleted.
Page 44

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Extracted Material on Business Law

Business Law AAU, College of Business and Economics

Bilateral Contract. A bilateral contract is sometimes called a two-sided contract because of

ii. Consent (Consensus) : -

Common intention of the Parties

Communication of Consent (Art. 1681)

Product Unit price

If a promise of reward is to a specified person or group of persons it becomes an ordinary

Change or withdrawal of an offer is not a fault when it is withdrawn or changed.

Acceptance (Art 1681-1685, 1689(1), 1694) (1893(3)

Contract depends on agreement of contracting parties. There is no contract without

General Terms of Business No party can be assumed to be bound by general terms of

A/ mistake must be fundamental (Art 1998) – A mistake is fundamental when a person

False statement (Art 1705) false statements is untrue statement made

Defect in Consent Due to Lesion (Art 1710)

Limitations to Freedom of Contract However, parties’ freedom of contract is not absolute

abolition freedom of contract. Freedom of contract is less relevant without freedom of

Freedom of Form (Art 1719)

A/ contracts required by the law to be made in writing

B/ contracts required to be made in writing by the parties

Probatory value of written instrument (Art. 2005) A written instrument is a conclusive

Written form (Art 1727-1729)

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