Contract Law (PDF)

on the debtor by interpretation. This is in accordance with Amharic saying „if your friend is honey do not take it all‟ (Art. 1739). However, an exception to the principle of interpreting in favor of the debtor is contract of adhesion (Art. 1738(2)). If a contract is a contract of adhesion, the cou...

on the debtor by interpretation. This is in accordance with Amharic saying „if your friend is honey do not take it all‟ (Art. 1739). However, an exception to the principle of interpreting in favor of the debtor is contract of adhesion (Art. 1738(2)). If a contract is a contract of adhesion, the court shall interpret the provisions or words in the adhesive contract against the party who prepared such contract (Art. 1738(2). In this case, the stipulator of the adhesive contract may be debtor but he cannot benefit from the dispute on the meaning of provisions or words in a contract since he should have prepared the contract free of any defect. He cannot benefit from his own fault. Moreover, a stipulator of general terms, models or forms is mostly monopoly supplier or big companies that greatly influence the bargaining process. Most probably the other party did not have an alternative except entering (adhering) to the stipulation. So interpreting such contract against the stipulator even when he is a debtor has customer protection in mind. 3.3 Performances of Contracts (Art. 1740-1762) Performance of contract means fulfilling one‟s own obligation as agreed. If the obligation is to “do”, doing what was provided in the contract exactly in the same way as provided, if the obligation is “not to do” forbearing from doing what is forbidden by contract and if the obligation is to “give” delivering the thing with its accessories on the agreed date and place is called performance of a contract. So the major questions during performance are „Who perform contract‟? To whom should contract be performed? What should be performed, When and where should it be performed? Art 1740-1762 can be taken as interpretation of a contract by legislator since these provisions are supplementary or complementary to parties‟ agreement. Page | 101 3.3.1 Who Performs Contract (Art. 1740) The contract can be performed by the debtor, his agent or by person authorized by court or law (Art. 1740(2). The persons authorized by law are tutors, liquidators, trustees and person authorized by court is either a curator or an interested creditor who wants to save the rights of the debtor by performing his obligation. However; the law never mention about performance of a contract by a third party not authorized by debtor, court or law. However; we can easily argue that if the creditor accepts the payment, the debtor has no right to stop third party from performing the obligation since the creditor has a right to assign his right to a third party without the consent of a debtor (Art. 1962). In such case, if the debtor insists on paying the debt, he can pay it to the person who paid the creditor (Art. 1824). The law refrains from including unauthorized third party in the list of Art 1740(2) since assignment of a right is a contract. A creditor is not duty bound to receive payment from a person not authorized by debtor or court or law, he is free to accept or reject such payment without any effect on his right against the debtor. However; the creditor may sometimes insist that debtor himself should perform the obligation (Art. 1740(1). This is when the contract or law expressly provides that the debtor shall perform the contract personally. For example, Ethiopian labor law provides that the employee should perform the contract personally. So, if certain construction company employees A as a daily laborer, he cannot authorize his son or brother to carry out the labor work and the company can refuse to accept A‟s son or brother and dismisses A from work. Moreover, the second case where personal performance becomes necessary is when the creditor proves that personal performance is essential to him. The creditor can be able to prove such only when the obligation is obligation to “do” of a professional nature or art. For example, a lawyer, or a doctor can not authorize a duty which he agreed to do. Moreover, a musicians, painters, Poet, actor, dancer etc cannot authorize someone to perform his obligation. Page | 102 Generally, creditor should accept performance either from the debtor, his agent or person authorized by the court of law unless he proves that personal performance of the contract is essential to him or contract law expressly provides personal performance. 3.3.2 Who May Receive Payment (Art. 1741-1744) Payment should normally be made to the creditor or his agent (Art. 1741). However; payment may be made to a tutor, liquidator, or trusted (Art. 1741). Failure to perform contract to a liquidator or trustee is non-performance. Payment to Incapables (Art.1742) If the creditor is a minor or judicially interdicted person, payment should not be made to such creditor (Art. 1742). E.g. Abebe, a minor, bought bicycle for birr 1500 from Beshadu. Beshadu shall not deliver the bicycle to Abebe. She should rather deliver it to his tutor. Incidentally, Art.1742 has some redundancy with Art. 1815, 2162 and Federal Revised Family code Art. 302. So Art. 1742 shall be framed as follows; Art.1743 Creditor Incapable. A debtor may not make payment to an incapable creditor. Payment to Unqualified Creditor (Art.1743) Another issue in relation to creditor is payment to unqualified person. In principle, payment to unqualified person is invalid. But in the following case, such payment is valid (Art. 1743); a) Payment benefited the real creditor The creditor is benefited when the debtor pays the debt of the creditor. For example, Challa borrowed 50,000 birr from Legese. Legese bought a car from Balew for birr Page | 103 505,000. If Challa pays to Balew thereby releasing Legese from paying sale price, the payment will benefit Legese. Notice that such payment may be paid either without the knowledge of creditor or even against his express opposition. b) Payment confirmed Here even if the creditor did not benefit from the payment, he may confirm the payment. Such confirmation has the effect of ratifying an act done without authority (Art. 2192, Art. 2190). However; the creditor cannot be willing to confirm unless he benefited from the payment. When confirmation is because of benefit such confirmation does not have legal importance. The possibility of getting confirmation without benefit emanates either from good faith or from fear of prosecution against relatives who might have received the payment (sees Art. 1708). For example, a debtor paid the debt to a daughter of a creditor who used the money for enjoying herself in big hotels. A father creditor may confirm such payment. c) Payment to a person with a valid title Here the holder of the title is legally entitled to claim payment although he is not the real creditor. The document gives an apparent right to the holder. The payment made to an apparent creditor is valid even if the document is invalidated later on. However; such payment to an apparent creditor never releases the debtor if the debtor knows that he is paying to apparent creditor. The examples of apparent creditor are; i.Certificate of heir annulled after payment is made (Art-1996-1998) E.g. Abebe applied to court and got a certificate of heir. Abebe collected money deposited by the name of the deceased in a bank (Art. 947). But later on a son of deceased applied and got Abebe‟s certificate of heir annulled. The son does not have any claim against the bank since the bank paid to a person holding valid title at the time of payment. ii.Document evidencing power of agency: a principal might have revoked the agency power but he may fail to collect the document from the agent and the Page | 104  agent may use the document to collect principal‟s claim. E.g. Mennen was authorized to collect the salary of Shenkute, her boy friend. But due to dispute between them Shenkute informed Mennen that he revoked her authority and also got such revocation registered with government authority but failed to collect the document from Mennen. Mennen then collected Shenkute‟s salary. Payment made to Mennen validly releases Shenkute‟s employer. iii.Holder of Negotiable Instruments (Art. 716 Art. 751 of comm. code) A debtor who paid to a holder of negotiable instrument in accordance of the rules of transfer of negotiable instrument is released from his obligation. E.g. Bilisuma issued a check to Gebru and thief stolen the check from Gebru‟s pocket and received payment from Dashen Bank. Bilisuma is released by such payment. N.B In all of the above case, the debtor should be in good faith. For example if the real creditor warns the debtor to forbear from paying the debt, the debtor is liable if he pays against such warning. Doubt as to the Creditor (Art.1744) Sometimes two or more persons may independently claim the payment of a debt. This mainly arises when the original creditor dies and heirs and creditors are claiming payment. The debtor is not a court and cannot settle such dispute, hence, he shall refuse to pay to any of them. If he wants to release himself from obligation, he can deposit the debt in court of law as per Art. 290 – 293 of the civil procedure code (Art. 1744 (1). If he is not willing to deposit his debt, any claimant may require him to deposit in court (Art.1744 (3). In short when the debtor is unable to know the real creditor he shall deposit the debt in court either by his own initiative or by the request of the claimants. For example, a bank received a notice that a check held by Emru is void. On the other hand Emru is claiming payment. In such case the bank should refuse to pay Emru and can deposit the amount in court either by its own initiation or at the request of Emru or a person who gave notice to it. Page | 105 Incidentally these writers believe the Art. 1744 (2) has no better role than exemplifying Art. 1743 (2) 3.3.3 What to Perform (Art. 1745 – 1751) What to pay (perform) answers the question relating to identify, quality or quality of the thing to be delivered. To properly answer such question we will classify things into definite thing, fungible things and money debts. Incidentally, Art.1745–1751 do not seem to apply to obligation “to do” or “not to do”. Definite Thing (Art. 1745 – 1746) The debtor shall deliver the thing agreed (Art. 1745). The creditor may however, accept things of different identity if he wants. If the creditor accepts the new thing offered to him by the debtor, it means that they agreed to vary or modify contract. Such variation may need to be made in a special form (Art. 1722) when necessary. So rather than the quality of the alternative thing delivered what is important is the consent of the parties. Nobody is bound by what he did not consent to be bound. E.g.1 Abel agreed to sell Adaa teff to Gebru. But since Abel is unable to get Adaa teff he supplied Menjar teff of the same quality. Gebru can refuse the delivery. E.g.2 Alemu ordered a goldsmith to prepare bracelet from 21 karat gold but the gold smith prepared the bracelet from diamond, Alemu can refuse such bracelet. E.g.3 Abebe bought ox Z from B but since ox Z died before delivery, B offered to deliver ox Y but Abebe may refuse such delivery. N.B Definite thing is a thing that can easily be identified from similar things of the same species. In short definite thing has its own peculiar identity. Animals and immovable are most prominent examples of definite things. If a thing is definite thing, we can not find its Page | 106 replicate in the world. However, for contract law definiteness of a thing simply indicates that a thing which is a subject of sale is indicated in the contract in its own specific name. For example if the sale is white teff the thing is definite in relative to the generic term teff. However; when we come to groups white teff itself is indefinite thing since white teff is of different variety. The creditor has also a right to refuse part payment. He has also a right to claim part payment and bring court action for the remaining part or give grace period for such part payment (Art 1746). Fungible Goods (Art. 1747–1748) Fungible goods are goods that are indicated in the contract by using generic terms such as pasta, teff, wheat, barely. In such case since the thing is not expressly indicated in the contract, the contract is interpreted in favorer of the debtor (Art. 1738 (1) and the debtor can freely determine its quality (Art. 1747). However, the quality should not be less than the average (Art.1747 (2). For example, if a seller agreed to sell five hundred quintals of teff. He can deliver teff of average quality. Delivery of insufficient quantity or quality (when the quality was already agreed up on) does not necessarily lead to the cancellation of the contract unless it is declared to be fundamental breach of contract (Art. 1748 (1) cum. 1785 (2). Incidentally, the phrase “... essential to him…” under Art.1748 (1) should be given equivalent meaning with the phrase “... fundamental provisions of the contract.” under Art.1785 (2). Moreover; even if the quantity /quality is not essential or fundamental to the creditor, the contract may provide unilateral cancellation if such quality or quantity is violated (Art. 1786 cum. 1748 (1). Money Debts (Art. 1749–1751) If the debt is money debt, payment should be made in local currency of place of payment (Art. 1749 (1). For example, if the place of payment is in USA, payment should be made in US Dollar for two reasons. Firstly, the debtor may not be able to get the foreign Page | 107 currency in the place of performance. For example, in Ethiopia only importers are allowed to purchase foreign currency in the market. Secondly, it may be illegal to carry foreign currency for more than a certain time limit. For example, in Ethiopia any person who carries a foreign currency for more than forty – eight hours is criminally liable. If payment is in a local currency, the issue that comes to our mind is the exchange rate. For example, if contract provides that the debtor pays birr 200,000 on April 29 in USA, the birr should be converted into Dollar. The question is “how much dollar is birr 200,000”. This is determined on the basis of exchange rate on the day of payment (Art 1750). But the law never answers the place that is to be used as a reference to determine the rate. For example the exchange rate of birr in dollar may differ in USA and Ethiopia on the same days. In USA one dollar on April 29 may be birr ten but in Ethiopia one Dollar may be birr thirteen. So if the debtor claims that the exchange rate should be determined on the basis of the exchange rate in Ethiopia, the amount of dollar that he pays is less than the amount of dollar he pays if US market is used as reference. If we see the above example, if the reference is US market the debtor pays 20,000 dollar but if the reference is Ethiopian market the debtor pays 15384.615 dollar. Although the law is silent on this point, the writers believe that the place where the currency indicated on the contract serves as medium of exchanges should be taken as a reference market to determine the exchange rate. For example, in the above case, Ethiopia exchanges market should be a reference market. Another issue that is not solved is unavailability of exchange market. For example, what if the currency indicated on a contract is Birr and place of payment is Peru and Peru‟s currency is not available in Ethiopian foreign exchange market and Ethiopian birr is not available in Peru‟s foreign exchange market. In such case, the solution is to convert the birr into Dollar in Ethiopia and convert that Dollar into Peru‟s currency in Peru‟s exchange market. For example, if the debt is birr 1000, 000 and to be paid in Peru. We first convert the birr into dollar in Ethiopian market, and say one million birr is hundred thousand dollar in Ethiopia‟s exchange market and we will convert such 100,000 dollar into Peru‟s currency in Peru‟s foreign exchange market. Page | 108 Notice that parties may agree that payment shall be made in actual currency indicated on the contract (Art.1750). Incidental to money debt are inflation of currency and interest rate. Parties may avoid inflation by determining the amount of money debt in reference to the price of a specified good. For example, a person who lends birr 200,000 to be repaid after ten years may say that the amount to be repaid shall be able to buy 50 tons of first quality Addaa teff. Art 1749 (2) is not a law since it imposes obligation on no party; it is simply reminding the parties the possible option of avoiding or reducing the consequence of inflation. The draftsman tried to give justification for the inclusion of such provision in the code (David p.45). He included such provision in order to avoid a doubt as to the legality of such provision (ibid). However; such justification may be contradictory to freedom of contract (Art. 1711 cum. 1731(2)). The parties can freely determine content of contract as far as it is not contrary to mandatory provisions of the law. 3.3.4 Appropriation of payment (Art. 1752-1754) Appropriation of payment is important when the debtor pays only part of his obligation. Such payment has some effect on the rights of a creditor in relation to the remaining obligation. For example, in case of cost, interest and principal debt, the appropriation of payment matters when the debtor pay interest on the principal but does not pay such interest on cost and interests. In case of two or more principal obligations also some of these obligations may impose more burdensome obligation. Therefore, appropriation of payment is very important. Principal Debts and its accessories (Art 1752) If a person is unable to pay the whole debt (principal, interest and cost) at one time, the part payment made by the debtor shall be appropriated firstly to the cost; secondly to the interest; and finally to the principal (Art. 1752). For example, Belaynesh borrowed birr 100,000 in 2000 at a rate of 9% per annum and debt was to be paid after five years. But Page | 109 Belaynesh failed to pay the debt, and the creditor brought court action and incurred cost of birr 10,000. So the principal debt is 100,000, interest, 72,000 and cost 10,000. Assume Belaynesh made a payment of 30,000; the apportionment is first to the cost so the cost is extinguished and the remaining 20,000 is apportioned to the interest. So the debt of Belaynesh is principal 100,000 and interest 52,000. The effect is that the interest continues to count on the total 100,000 birr. Multiple principal Debts (Art. 1753-1754) In case of multiple debts, choice is given to the parties and only if they fail to exercise their right of choice that the legislator chooses the debt to be paid first and the debt that follows. Choice by the parties (Art.1753) unless the parties agree that choice should be made by the creditor, the law presumes that the right to choose is for the debtor (Art 1753 (1). This is in accordance with the principle of interpretation in favor of the debtor. The debtor may indicate his choice by opposing an appropriation made by creditor on receipt of payment (Art. 1753(2). However, if the debtor has failed to indicate his choice to the creditor and has not opposed the appropriation written on the receipt, the debtor is presumed to have given this chance to the creditor. So the choice of the creditor binds the debtor (Art. 1753) (2). For example, Abebe borrowed birr 500,000, he also bought a car for birr 300,000 from the same creditor. Then Abebe made a payment of 300,000 and indicated that he was paying the loan. In the same case if Abebe made payment without indicating the debt and the creditor gave a receipt for payment of sale, Abebe can immediately object the appropriation and indicate his own preference. The debtor should object as soon as he receives the receipt. Objection is not enough, he should indicate his preference, and otherwise the creditor could still continue to choose among the remaining debts. Choice by the law (Art. 1754) When both the debtor and creditor fail to indicate the appropriation the law presumes the following appropriation. Page | 110 Debts already due. Appropriation is to the debt which is most advantageous to the debtor (Art.1754 (2). For example the loan of 500,000 which imposes 12% interest rate and which was due on Jan 2, 2008 and sale price without penalty any payment made by the debtor shall be appropriated to the loan. (See also Art. 1754(3).) Debts due vs. future debts: - Appropriation shall be made to the debt which is already due (Art. 1754(1). Future debts Vs future debts: - appropriation is to the debt which becomes due earlier (Art.1754 (1) Future debts having the same due date: to the debt which first appropriation benefits the debtor most (Art. 1754(2) but if the advantages are equal payment shall be appropriated proportionally (Art. 1754(3). 3.3.5. Place of Performance Place of performance has an implication on cost of payment, currency for money debts and territorial jurisdiction of court (Girma, 2002, p 124).Therefore determining place of performance has a multifaceted consequences. The civil code provides three alternatives; agreed place, residence of the debtor and place where the thing situates. Here we can notice that the law tries to determine place of performance by giving much emphasis to the intention of the parties. The law encourages the parties to determine place of performance in their contract. Contractually agreed place should include places that can be determined by reference to usage; equity and good faith (see Art.1713). But if they fail to mention place of performance the law then resorts to search the possible intention of the parties (implied agreement of the parties). By so doing it reached at the conclusion that in case of definite thing the parties should be presumed to have agreed to perform the contract at the place where such definite thing situate at the time of conclusion of contract.(time of conclusion of contract is to be Page | 111 determined by reference to Art. 1692). We have to notice here that there may be difference between place of conclusion of contract and place where the definite thing situate at the time of conclusion of contract. Moreover, the place where a thing situate at the time of conclusion of contract and at the time of performance of a contract may be different i.e. the thing might have been shifted from the place where it was at time of formation of contract. Although it is presumed that parties had knowledge as to the where about of the definite thing at the time of conclusion of contract concerning such thing (since most probably the creditor/debtor does not agree with out seeing the thing and the place where he saw the thing and the place where it situate at the time of conclusion of a contract, most of the time, overlaps) lack of such knowledge never affect place of performance. The last resort of the law is to rule of interpretation in favor of the debtor. Such interpretation leads to the residence of the debtor. By so doing the law exempts the debtor from transportation cost, inconveniences and waste of working hours. So delivery of fungible things should be made at the residence of the debtor (Art.1755 (2). However; the debtor may have more than one residence (Art 177(2). In such case the place of performance is the principal residence and the adjective normal which is used by Art..1755 (2) to qualify the noun residence should have the same meaning with the adjective principal which is used by Art.177(2) to qualify the same noun. Generally Ethiopian civil code advises the parties to exercise their freedom of contract and determine place of performance. But if they fail to do so the law imports the old maxim, debt is not portable but fetchable i.e. the creditor has to go to either to the place where the definite thing situate or to the residence of the debtor. The claimant has to his claim and his claim never come to him. Page | 112 Exercise Determine place of performance in the following cases Case 1 Abele and Mesnesh Law School P.L.C entered into an agreement that Abele gives lectures six hours per week to students of the Mesnesh Law School P.L.C. The lecture was to be given for sixteen consecutive weeks. They agreed that Abele receives birr 40, 0000 at the end of the lecture period. They further agreed that the lecture should be given on weekends. The normal residence of Abele is Hawassa and Mesnesh Law School P.L.C. has a campus only in Shashemene , a town found 25 km north of Hawassa. Case 2 Obang is a resident of Bishoftu town which is found 47 km south east of Addis Ababa. Once while Obang was visiting his fiancée in Addis Ababa he got Bokasa, who is a good mechanical engineer. Obang told to Bokasa that his car was seriously damaged and parked in Adama and he had been looking for an engineer. Bokasa offered to repair the car for birr 10,000 provided spare parts expenses are covered by Obang. Obang happily accepted the offer. However, they did not talk about place of performance. Bokasa has garage business in Addis Ababa only. Case 3 Dr. Hunegnaw and W/ro Tamyelesh entered into Medical Contract on January 23, 2008 at Dr. Hunegnaw‟s residential house located in Sendafa town 25 northeast of Addis Ababa. Dr. Hunegnaw agreed to do his best to cure W/ro Tamyelsh from gastritis. The lady agreed to pay birr 15,000 including lodging and feeding expenses. But they did not raise any thing about place of treatment. Although Dr. Hunegnaw occasionally gives medical treatment at his home residence (Sendafa), he usually and normally treats patients in his clinic found in Addis Ababa. W/ro Tamyelesh is the resident of Sendafa and she is expecting Dr. Hunegnaw to treat her in Sendafa whereas he is urging her to go to his clinic so that he can properly carry out his obligation. Case 4(see G. Krzeczunowicz,1983,p.104) Yirgashewa bought property insurance against fire for his villa found in Debrebirhan town (about 130 km north of Addis Ababa) from Page | 113 Ethiopian Insurance Company. Such insurance contract was concluded in Addis Ababa on April 12, 2008. The guaranteed amount was birr 350,000 and the premium was birr 250. The contract was to enter into effect starting from the date of payment of the premium and remain effective until April 12, 2009. Yirgashewa agreed to pay premium on April 25, 2008. The contract, however, does not mention place of payment of the premium. Yirgashewa has been domiciled in Debrebirhan since 2005 and he has had no residence in Addis. Ethiopian Insurance Company has had no branch in Debrebirhan. When Yirgashewa called the manager of Ethiopian Insurance Company to receive payment of the premium in Debrebirhan the manager warned him to make payment in Addis. Yirgashewa refused to pay in Addis and the manager wrote two consecutive letters to his address on April 30 and June 2, 2008, the last one suspending the insurance contract. Although Yirgashewa received both letters he has been insisting that Ethiopian Insurance Company should receive payment in Debrebirhan. While the controversy was going on, Yirgashewa‟s house was consumed by fire on June 15, 2008. 3.3.6. Time of Performance Time of performance is very important to determine transfer of risk (in case of contract that transfer ownership such as sales and donation see Art.1758), cost of maintenance and preservation (see Art.1779-1783) and most importantly to claim damage for non- performance. Although time is not the only cause for non performance, when we think of non-performance the first thing that comes to our mind is probably time of performance. Time of performance greatly affects the benefit parties expect to derive from the contract. This is especially true when there is market instability which has become the feature of modern economy. The importance of time also depends on the nature of the contract or obligation of the parties. Time of performance generally reminds us an Amharic saying which goes as follows; „I am dying this evening but the harvest is in the coming summer.‟ Page | 114 Like in place of performance, parties are advised to determine time of performance. So performance should be made at agreed time (Art.1756 (1). However the law still plays the gap filling role. As indicated under Art. 1695(1) the law remedies the deficiency of the agreement of the parties. Therefore; where there is no contractually agreed time, contract should be performed when either the debtor Art.1756 (2) or the creditor demand performance (Art.1756 (3). This means, once the contract is concluded, time of performance can be determined either by the debtor or creditor. If both of them determine date of performance the earliest date is performance date. The debtor demands earliest performance either to avoid cost of maintenance and preservation or to transfer risk or to relieve him self from psychological burden of debt. Earliest performance can also have its own advantages and disadvantages to the creditor. As indicated under Art. 1756(2) by the phrase forthwith the creditor must take delivery just at the time he is informed to take delivery. Otherwise the debtor may exercise his right under Art. 1779. Notice that Art.1756 (3) does not contain the phrase forthwith (see Tilahun, 1989, p.99). Instead it contains the phrase whenever which is retranslated as as soon as by G. Krzeczunowicz (G. Krzeczunowicz 1983, p.104). This means the idea intended to be conveyed by Art. 1756(2) is different from that of Art 1756(3). Therefore; although the creditor may be required to receive payment just at the moment the debtor wants to make payment, the creditor is expected to give reasonable time to the debtor. A creditor never invoke non-performance without giving default notice (Art.1772) and in his default notice he may fix a reasonable period that enables the debtor to carry out his obligation (Art.1774). If he has not fixed time in his default notice or the time is unreasonable he may resort to the remedy provided under Art.1785. In conclusion, time of performance is determined either by contract or unilaterally by any party to the contract and the mere failure to indicate time of performance never makes the contract incomplete. However in the following four cases the debtor may unilaterally postpone time of performance indefinitely (Art.1757 cum.1759, see also G. Krzeczunowicz 1983, p.108-9). This is to reduce the risk of non-performance by the Page | 115 opposite party. As a result Art. 1757 and 1759 exclusively relate to bilateral contracts (see also Girma 2002, p130). 1. Simultaneous Performance It is the corollary of unilateral declaration of time of performance. By exercising their right both side of the parties may determine time of performance and that time of performance may be coincided thereby implying simultaneous performance. Even in cases when time of performance for one side of the obligation has been fixed by contract time of performance for the other side of the obligation fixed unilaterally may coincide with contractually fixed time. For example, assume Abrehet and Yitayal entered into a contract of hiring whereby Abrehet agreed to give combiner and harvester to Yitayal for two months and Yitayal agreed to pay a lump sum of birr 5000. Further assume that time of delivery of the combiner and harvester and time of payment of the rent has not been indicated in the contract. Yitayal may demand the delivery of the combiner and harvester and Abrehet has to deliver soon. But Abrehet has also the right to claim payment of the rent at the time Yitayal claims delivery. So coincidence of time of payment is created leading to simultaneous performance. If time of delivery of the combiner and the harvester was contractually agreed to be August 24, Abrehet may unilaterally decide that payment the rent should also be made on August 24, which leads to simultaneous performance. However, if time of performance of both sides of the obligation is contractually determined, there is no concept of simultaneous performance; both sides of the obligation should be performed on the date fixed by the contract (Art.1757 (1). For example, in the above case if the date of delivery of the combiner and harvester contractually fixed to be May 23 and date of payment agreed to be two months after delivery there is no concept of simultaneous performance. Page | 116  2. Anticipatory Breach of Contract It is when the debtor informs the creditor before the debt is due that he (debtor) will not perform his obligation (Art.1757 (2). Such information may be implied from conduct of the debtor or from express statements addressed to the creditor (G. Krzeczunowicz, 1983, p.106). For example, if A and B entered into construction contract whereby A agreed to construct B‟s G +3 residential house in Awassa and B agreed to pay 25% of the total construction price one month before the construction starts. They agreed that the construction had to start on August 12, 2008. A won a big construction project in Mizan on July 12, 2008 and went there to start the work that takes a minimum of four years. Here A, by his conduct shown his intention not to start construction of B‟s residential house. So B is entitled not to make any advance payment. In short if there is a reasonable suspicion that one party may not honor his future obligation the other party is not bound to carry out his obligation. Anticipatory breach under Art 1757(2) is invoked when time of performance of both sides of the obligation has already determined by contract and the party claiming anticipatory is duty bound to perform his obligation earlier than the party who has intended to breach the contract. For example in the above construction contract case if B was not obliged to pay advance and if the date A had to start the construction of the residential house was not determined Art 1757(2) does not apply. In short anticipatory breach Under Art.1757 (2) is a justification to refuse performance whereas under Art.1789 it is used as a justification to cancel the contract. However; under Art.1788 anticipatory breach exist only where there is express declaration by the breaching party or in case of implied anticipatory breach the party intending to cancel the contract gives default notice. In short, under Art. 1788 conduct does not unequivocally indicate anticipatory breach. However, the party has an option to claim performance by providing sufficient security that he will perform his obligation (Art.1759). Page | 117  3. Insolvency When a person is declared bankrupt, all his future debts mature on the day he is declared bankrupt (Art.1868). So, he has to pay all his future debts on the date he is declared bankrupt. Any payment after that day may be equivalent to non performance or breach of contract. So a person declared bankrupt loses benefit of time that he obtained by contract and cannot claim performance unless he himself is ready to perform his obligation (Art. 1757(2). Notice that under both Art.1757 (2) and Art. 1868, the type of bankruptcy should be legal bankruptcy. Factual bankruptcy never entitle the other party to refuse performance unless it amounts to anticipatory breach or the securities are damaged by the act of the debtor or act of God, provided there is no insurance for such loss. 4. Breach Although breach of contract is discussed under chapter four , a party who violated his own contractual obligation does not have moral and legal basis to complain for breach of contract since the other party can have a counter claim or set-off(Art.1757(1). Note that for the purpose of Art. 1757(1) breach of contract includes refusal to give receipt (G. Krzeczunowicz 1983, p.109) 3.3.7. Transfer of Risk Transfer of risk is what logically comes to our mind after we discuss time of performance. Transfer of risk is dependent on time of performance. So it is logical that Art. 1758 comes immediately after Art.1757 (however; Art.1759) should have been sub- article 3 of Art.1757.).(See G. Krzeczunowicz 1983, p.106 foot note 9.); however transfer of risk is an issue only in contracts that involve transfer of ownership. It is not a common characteristic of all contracts. The relevant law to discuss transfer of risk is law of sales. Page | 118 3.3.8 Cost of Payment (Art.1760) Art.1760 applies when the court is unable to ascertain a party that should bear the cost of payment by reference to their contract or custom, equity and good faith as indicated under Art 1713.According to G. Krzeczunowicz; Costs of payment are e.g. those of counting, measuring, weighing, packing etc. and not those of forwarding, unless a payment place other than that of Art.1755 (2-3) is agreed (a frequent case).Cost of payment (also) comprises those of the receipt that is in practice the amount of any stamp duty on it, to be reimbursed by the debtor. If the payment due consists in a formal conveyance e.g. of a house the debtor bears the cost of the deed and its registration. (G.Krzeczunowicz, 1983, p.109)` 3.3.9 Debtor’ Right to Receipt (Art.1761-1762) Whenever required, the debtor has a duty to prove that he has properly discharged his obligation (Art.2001 (2). One means that the debtor can use to prove the performance of the contract is by obtaining written evidence from the creditor (Art.2002). Moreover; an agent has duty to account to the principal all expenses made by him on behalf of the principal. Furthermore; government agencies and business organizations especially those working in the financial sector have legal duty to undergo internal and external auditing. Such accounting or auditing is possible only if the agent or the company is able to provide evidence for expenses it has made. Such evidence is also very important for calculation of tax obligation. Receipt is, therefore; such written evidence given by the creditor to the debtor. The debtor has a right to claim receipt and a creditor has an obligation to give receipt. In addition to claim receipt the debtor has also the right to claim the cancellation or return of documents evidencing the obligation, provided he has fully discharged his obligation (Art. 1762). If the debt is partly performed such part performance has to be indicated on Page | 119 the document evidencing the obligation. If the creditor alleges that the document is lost he has to give to the debtor another written document that contains his allegation. The creditor has a duty to prove that there was a contract between him and the debtor (Art.2001 (1). If the contract was in written document he proves by presenting such written document (2003). If he returns he has no means to prove the obligation. Even if he uses other alternative means of prove, the debtor can show that he has performed the obligation by showing that the document evidencing the obligation was returned to him. Returning document evidencing obligation to the debtor raises the presumption that the debt has been paid (Art.2020). If partial payment was indicated document evidencing obligation the evidence to be presented by the creditor enables the debtor to prove that he has partly performed his obligation, including the extent of such part performance. If the document was destroyed the creditor has less chance to improperly claim second payment (but see Art.2003 which gives the room for witness testimony.) Activity A debtor can claim either receipt or the return of document evidencing the obligation but not both. Comment the validity or otherwise of this statement. 3.4 Variations of Contracts 3.4.1 Introduction Variation is making amendments to the provisions of a contract. Variation makes change on the object of the contract. Variation of Contract is equivalent to amendment of law. Variation normally becomes necessary because of fundamental changes in circumstance that the parties or the legislator does not want to tolerate. Minor changes are always expected and may not lead to variation of Contract. Contract may be varied by the parties, legislator and judiciary. Page | 120 Variation of a contract by parties is a contract itself (Art.1675). So, as far as the requirements of Art 1678 are fulfilled parties can modify their contract at any time for any reason. Since a contract is a law the legislator may also vary its contents either by a law issued prior to the conclusion of such contract or by a law that is issued to modify certain already concluded contracts. The former case can be exemplified by Art.1748 which forces the creditor to accept insufficient quantity or quality. For the later one the best example the foreclosure law issued in Ethiopia in 1998. As per that law any pledged or mortgaged property can be sold by the pledge or mortgagee bank and this law was to apply on all contracts including on those made before the issuance of the law. Activity Search for additional provisions of the law that modify contract. Imagine circumstances that may necessitate the issuance of a law to modify the already existing contract. The judiciary does not have inherent authority to amend a law. However; the legislator may also expressly delegate its authority to the judiciary. So the judiciary modifies contract not because it finds out that the provision of the contract is unfair but because the legislator orders it to do so. While delegating its power, the legislator should indicate the limit of the delegation and guidelines to exercise such delegation. Art163-1765 is intended to make clear to the judiciary that it does not have inherent power to modify contract. Inherent power to modify the contract belongs to the parties themselves or the legislator. Art.1766-1770 indicates the limits of delegation and guidelines to exercise such delegation. Activity Can variation of a contract be delegated to the executive by the legislative? Page | 121 3.4.2 Judicial Variation of Contract As indicated above, court may be delegated to vary a contract. The court is normally delegated such power when fundamental change in circumstance affects the object of the contract (Art.1766-1770). However; court may also vary a contract where there is undue influence or lesion that never leads to invalidation of the contract (see G.Krzeczunowicz, 1983, p111). Accordingly; in the following court may modify  contract between persons having Special Relation: Here the phrase special relationship must refer to relations that are recognized by the law such as spouses, relation by consanguinity and affinity, employer-employee, subordinate, lawyer-client, doctor-patient and agent principal, partners in Ordinary Partnership. (See Tilahun, 1989, p. 141). Even it may be argued that Art. 1766 should in practice be limited to family relation only since it is only in family relation that parties do not want to think seriously about the obligation they enter into. Family members normally live by financially supporting each other particularly in countries like Ethiopia. In other types of relation contract is normally entered into by arms length there is no possibility of financially supporting each other: no party can financially rely on opposite party. So cases other than family relations should either fail under defect in consent (undue influence, lesion) or under special provisions of the law (agency, Art.2219 (2), intellectual work, Art.2635 e.t.c). In short Art. 1766 applies when one side of the obligation become onerous than he foresaw due to change in circumstances. There is a Cassation decision that modified lawyer‟s service fee. In Aster Araya vs. Girma Wodajo case presented to Federal Supreme Court Cassation Division on Hamle 29, 1997, File No. 17191 the court ruled that although courts do not have the power to declare that a contract is non-binding it can reduce amount of fees to be paid. Page | 122   Contract with public administration A government has legislative and policy making power that may enable it to change the balance of contract in its own favor. Especially in countries like Ethiopia which follow developmental state policy, the government has greater role to manipulate the market. So had it been for Art. 1767 entering into a contract would have been a very risky transaction. So now the government has to either refrain from taking measure that make the obligation of debtor more onerous or must cover the costs of its measure on the debtor. E.g1 Aba Dagnew Construction P.L.C. entered into a construction contract with Ethiopian Road Authority to construct 180 km asphalt road for birr 360, 000,000(three hundred sixty million). At the time the contract was concluded asphalt used to be imported custom duty free but few months after twenty five percent custom duty taxes was imposed. E.g2 Aba Tatek Construction P.L.C. and Addis Ababa City Administration entered into a construction contract in 2006 whereby Aba Tatek Construction P.L.C. agreed to construct ten thousand condominium houses at a total cost of birr 1,000,000,000(one billion).The construction was planned to be completed until October 2010. But in 2007 Ethiopian National Bank changed its Monetary Policy and devalued birr by 500%. As a result of such devolution cost of labor and construction material increased by 600%. Notice that government includes any state agency both in the federal and state level having the authority to make policy or law. Such new policy or new law should not have been foreseen at the time of conclusion of contract. Fuel price revision in Ethiopia, for example, is something expected after every three months. Page | 123   Partial Impossibly of Performance If obligation was partially impossible at the time of conclusion of a contract, the appropriate governing provision is Art.1813. Thus Art.1768 applies if impossibility occurs after the conclusion of contract and if such impossibility never leads to breach of fundamental provisions of the contract as indicated under Art.1785. For example in a contract of sale of 200 quintals of coffee if hundred of them are damaged the court may require the buyer to receive the remaining hundred and make proportionate payment. Notice that Art. 1748 is conformity with Art. 1768. Likewise the application of Art.1768 should be limited to fungible things so that it should not contradict with Art.1746.  Time of Performance Court may also extend time of performance for a maximum period of six month (Art.1770). This extension has to be given when contract does not exclude the court from giving grace period. Moreover; the court must make sure that such extension of time causes little influence on the creditor and such influence is financial compensable. In other words the court must conclude that cancellation of the contract and giving of grace period will have equivalent consequence on the creditor. The court must also make sure that there is high possibility that the debtor will perform his obligation with in grace period. Notice that the creditor may deny the debtor to benefit from grace period by unilaterally canceling the contract. (See Art 1774, 1786, 1787) The prominent example is land lease contract between government and an investor. The investor has to begin construction within certain period and complete it within specified period. Such investor may benefit from Art. 1770. Page | 124  CHAPTER FOUR Non-Performance of Contract & Its Remedies 4.1 Introduction Under this chapter we will discuss, the meaning of non-performance and its remedies. Parties to a contract may provide their own sanctions for failure to discharge obligations. This kind of special terms of contracts will be discussed in Law of Contract II. Thus, the main concern of this chapter is the remedies available under the law. If it will thus first with definition of non-performance and the general remedies recognized in most legal systems. Then it will discuss the pre=requisites for invoking the remedies of non- performance, particularly the giving of default notice. Finally, it shall discuss the specific remedies provided under Ethiopian law of contracts. For better and an in-depth understanding, Students are required to read the relevant topics in the reference materials annexed to the teaching material. 4.2 Meaning and General Remedies of Non-Performance As stated under Article 1731 (1), a contract formed lawfully binds the parties as if it were law, which means that the parties shall perform (discharge) their obligations according to their contract and the law. The rules under Articles 1740-1762 regulate how performance should be made. If performance is made according to the contract and the law, it is deemed valid and releases a party (the debtor) from his obligation. Thus, non-performance refers to parties failure to perform contractual obligations in conformity with the terms of the contract and the law. It is also called breach of contract. This failure/breach may be total, where a party totally fails to honor the terms of contract. It may also be partial, where a party has performed his/her obligations only partly. It may also relate to delay in performance. Offering performance at a place other than the place agreed up on (place fixed by law) also constitute non-performance. Delivering a thing that does not conform to the contract or delivering a defective thing also amount to Page | 125 breach of contract. Generally any deviation by a party from the terms of the contract amounts to non-performance. It is clear that breach by one party affects the interest of the other party, which usually is referred to as the “Victim party”. Thus, it is logical to provide a solution/remedy for the party affected by non-performance. As discussed elsewhere, one function of contract law is to enforce contracts. One way of doing that is to provide remedies for non- performance particularly by sanctioning failures. Otherwise parties would be reluctant to enter in to a contract. It is commented that the rules on non-performance are intended to avoid the deterrence effect of non- performance on contractants for fear that their contract may not be performed; or in other words it is intended to secure contractual transactions. It is important at this junction to note that the parties may stipulate contractual remedies for breach, for example by incorporating penalty clauses. These kinds of remedies may be enforced by the law (see articles 1886-1895). However, the law of contract provides remedies even if there is no contractual provision to that effect. These are called legal remedies. The legal remedies for non-performance protect the interest of the party that is affected by non-performance. The interest that is affected by non-performance of the contract is the benefit, which could have been gained, had the contract been performed. Accordingly, the remedies are supposed to put the victim party in the position he would have been had the contract been performed. As such, in most legal systems, the law of contract generally recognizes three remedies. The first one is the enforcement of the contract. This remedy is designed to satisfy the victim party by enforcing the terms of the contract. It may be done either by compelling the debtor (failing party) to perform his/her obligations or by authorizing the creditor (victim) party to perform the debtor‟s obligation at the cost and expense of the debtor. The former is usually referred to as forced performance, while the latter is called substituted performance. Page | 126 The second remedy available to the creditor is cancellation of the contract. This may take place either court judgment (judicial cancellation) or unilateral act of the victim party. Unilateral cancellation applies in exceptional circumstances. In all other cases, the victim party may apply to court for declaration of cancellation and it is the court that has the ultimate power to declare cancellation or not. The effect of cancellation is to put the parties the position which would have existed, had the contract not been made. Thus, the Victim party can claim back what he has paid or delivered. In addition to this, he may claim compensation. The third remedy is damages (compensation). The victim party can claim compensation for the damage or loss he has incurred as a result of non-performance. This remedy may be claimed in addition to either of the above remedies or independently. In applying any of or a combination of these remedies, one should take in to account not only the interest of the creditor (victim party) but also that of the debtor (failing party), for example the debtor can not be required to pay excessive compensation, or his liberty be deprived. In addition, the law generally requires the party affected non-performance to fulfill certain criteria before resorting to the remedies of non-performance. The crucial prerequisite is that the victim party shall give default notice to the debtor, demanding the later to perform his/her obligations within a reasonable time. The purpose is to obtain voluntary performance before going top courts. Of course, there are certain circumstances, where the giving of default notice is not necessary. With this general background, we will discuss the remedies provided under the general provisions of Ethiopian contract law as well as the pre-requisites for invoking these remedies. Page | 127 4.3 General remedies of non-performance under Ethiopian law The general provisions of Ethiopian law contract recognize three types of remedies of non-performance. These are stipulated under two sub-articles of Article 1771 as the effects of non-performance. It reads as follows (1) Where party dose not carry out his obligations under the contract the other party may, according to the circumstance of the case, require enforcement of the contract or the cancellation of the contract or in certain cases may himself cancel the contract. (2) He may in addition require that the damage caused to him by nonperformance be made good Accordingly, the remedies of non-performance are (1) the enforcement of the contract, (2) Cancellation, and (3) Compensation /damages. As provided under the above provision, they are alternative remedies. So, the victim party may choose any of the remedies based on the circumstances. However, when we read this provision together with article 1790, we understand that the third remedy, i.e., compensation, can be claimed as independent remedy or additional remedy. Thus, damages may be claimed independently (for example where performance is delayed) or in addition to enforcement or cancellation. One crucial question is under what circumstances each of these remedies would be appropriate. Before addressing these issues, it is important to discuss the pre- requisites for invoking these remedies. 4.3.1 The pre-requisites for invoking the remedies of non-performance As indicated earlier, before resorting to the remedies of non-performance, the victim party shall put the other party in default by giving him a notice. Following, we will discuss the application of this pre-requisite under Ethiopian law as covered under articles 1772-1775. Page | 128 Article 1772 provides the general rule that the giving of default notice is a pre-condition for invoking the remedies of non-performance. It reads: A party may only invoke non-performance of the contract by the other party after having placed the other party in default by requiring him by notice to carry out obligations under the contract. As put by some commentators, this provision is self-explanatory. It clearly states that the giving of default notice is a necessary condition for invoking the remedies of non- performance. Default notice is demanding the debtor to perform his/her obligation within a certain time limit. It has a number of functions including that of reminding the debtor and reducing litigation. Though contested, it may also lead to the consequences stated under Article 1758, i.e., transfer of risk. However contested its functions may be, the giving of default notice is, as a matter of rule, a necessary pre-condition for invoking the remedies of non-performance stated under article 1771. A very important questions in this respect are when should default notice be given and in what manner. Another question how much time should the victim give to the debtor to perform his obligations. These issues are addressed under Articles 1773 & 1774. Art. 1773. – Form and time of notice (1) Notice shall be by written demand or by any other act denoting the creditor's intention to obtain performance of the contract. (2) Notice may not be given unless the obligation is due. There is no formal requirement for default notice & it may be given in any form: in writing, orally or clear conduct. What is crucial is an unambiguous, clear communication/expression of the creditor‟s intention to obtain performance of contract. Regarding time, sub article 2 says default notice cannot be given before the due date of the obligation. Normally, the creditor can demand performance only if the obligation is Page | 129 due and it is logical to say that default notice can be given only in respect of such obligations. Article 1774 stipulates that the creditor shall fix a period of time with in which he accepts performance, or after the expiry of which he will not accept performance. And this period of time must be reasonable to allow the debtor to discharge his obligations. The Provision reads as: (1) The creditor may in the notice fix a period of time after the expiry of which he will not accept performance of the contract. (2) Such period shall be reasonable having regard to the nature and circumstances of the case. One question that arises in this respect is What is the criteria to determine whether the time fixed in the default notice is reasonable or not? Such reasonableness shall be determined taking into account the nature and circumstance of the case. Such circumstance, in the case obligation of delivery, may include whether the thing to be delivered is in the hands of the debtor or whether it is to be manufactured in the future and the time needed for its manufacture. Exceptions to the rule As a rule, the law requires the creditor to give default notice to the debtor according to the rules of 1772-1774 in order to invoke the remedies of non- performance. However, there are exceptional circumstances where the creditor can resort to the remedies with out giving default notice to his debtor. These circumstances are provided under Article 1775. The caption of article 1775 stated as “ notice when unnecessary” suggests that the remedies can be applied with out default notice. Article 1775 reads as follows; Notice need not be given where: (a) the obligation is to refrain from certain acts; or (b) the debtor assumed to perform an obligation which the contract allows to be performed only within a fixed period of time and such period has expired; or Page | 130  (c) the debtor has declared in writing that he would not perform his obligation; or (d) it is agreed in the contract that notice shall not be required and the debtor shall be in default upon the expiry of the time fixed. These provisions provide four cases where the creditor invokes the remedies of non- performance with out giving default notice. The firs case indicated in sub (a) is where the obligation of the debtor is an obligation not to do, i.e., negative obligation. In this case, a non-performance results from the debtor‟s doing of the prohibited act. Since, the non-performance cannot be reversed /rectified by notice, the giving of default notice serves no purpose, and thus becomes useless/unnecessary. The second case indicated in sub (b) is when the obligation of the debtor is such that it may be performed only within a fixed time and the debtor fails to perform with in such time. Here the nature of the debtor obligation is a determining factor. It may be inferred from the contract that any performance after the expiry the time fixed is useless for the creditor. The time may be the most essential element of the contract, i.e., creditor has entered in to the contract expecting performance with in the time fixed. Assume, you have ordered cakes and drinks for the celebration of your birthday, and the debtor has promised that he /she will deliver them on time for the celebration. Here time is crucial. The contract does not allow late performance. Thus, if the debtor fails to perform his obligation within the time fixed, the creditor need not give default notice simply because performance is no more necessary. The creditor may invoke the remedies of non- performance with out giving default notice. The third case indicated in sub (c) is when the debtor communicates his refusal to perform in writing. This is sometimes referred to as anticipatory breach of contract. It is important to distinguish between refusal communicated in writing and others. The debtor‟s oral refusal to perform does not relieve the creditor of his obligations to give Page | 131 default notice. It is only when the refusal is communicated in writing that the creditor be relieved of the pre-requisite of default notice. What do you think is the reason? The last case indicated in sub (d) when the parties have in their contract excluded the giving of default notice. This is a recognition and implementation of freedom of contract; the parties are free to disregard/exclude the provisions of article 1772, thus a non- performing party is in default as of the expiry of the time fixed for performance with out need for the creditor to give a default notice. Thus, the creditor may invoke the remedies of non-performance immediately. To conclude, a party affected by non-performance shall put the debtor in default before he invokes the remedies of non-performance (1771) except in the four circumstances stated under article 1775. In the following sections we will discuss the remedies of non- performance outlined above. To remind you, these remedies are (1) enforcement of the contract, (2) cancellation of the contract, and (3) damages/compensation. These remedies are applied considering different circumstances. The circumstances, which determine the application of these remedies, have been provided in the preceding provisions starting 1776-1805. 4.3.2 Enforcement of Contract The enforcement of contract is sometimes referred to generally as literal performance or specific performance. Enforcement takes place through court order. Its purpose is to allow the creditor the benefit he expects from performance of the contract. It may take place either through Forced performance or substituted performance. We shall discuss them separately. Forced performance The word „forced performance‟ implies the compelling of the debtor to discharge his obligation. It refers to performance directly imposed on the debtor through the execution Page | 132 process. Thus, it take place through court order/judgement. However, it is important to note that the court may not order forced performance merely because the creditor has requested. The court has the power to order forced performance or decline considering the requirements set by the law. Article 1776 provides the conditions for ordering forced performance or otherwise. It reads as follows; Specific performance of a contract shall not be ordered unless it is of special interest to the party requiring it and the contract can be enforced without affecting the personal liberty of the debtor. Pursuant to this provision the requirements for the application of forced performance are (1) the creditor‟s special interest, and (2) the preservation of the debtor‟s personal liberty. These requirements are cumulative not alternative. The first thing that the court shall determine is whether performance is „of special interest to the creditor‟. The presence of special interest can be inferred form the importance of the obligation required to be discharged towards the creditor and its possibility of being discharged otherwise. If forced performance has no special advantage to the creditor, then the court may not order it. Then, the court shall consider whether forced performance affects the personal liberty of the debtor. As discussed elsewhere contracts are to affect the proprietary interest of parties not their liberty. A person cannot be deprived of his liberty for failure to discharge contractual obligations. Thus, if forced performance affects the personal liberty of the debtor, the court shall not order it. The two conditions must be fulfilled for the court to order forced performance. Here are some examples. Assume, a monopolistic entity which supplies vital goods (e.g water or electricity) or services (eg postal or telecommunication) to a customer cuts of its supplies. In this case the goods or services are so essential, and the customer cannot get them from other sources. Thus, it may be said forced performance is of special interest to the creditor, i.e., customer. At the same time, order the entity to provide these goods or Page | 133 services cannot deprive the entities liberty (as only physical persons enjoy liberty). So, in this case the court may order forced performance. Another example: an artist who has agreed to present his songs on a certain occasion in consideration of payment fail to discharge at the agreed time. It may arguably said, the contract is entered in to in consideration of his talents and that his performance of the obligation is of special interest to the creditor. However, to order the artist to sing with out his will amounts to deprivation of his liberty. Thus, in such cases, forced performance cannot be ordered even if it is of special interest to the creditor Substituted Performance In addition to forced performance, the law provides substituted performance as a remedy for non-performance under articles 1777 and 1778. Substituted performance is made at the expense and cost of the debtor. Art. 1777. –Obligation to do or not to do. (1) The creditor may be authorized to do or to cause to be done at the debtor‟s expense the acts which the debtor assumed to do. (2) The creditor may be authorized to destroy or to cause to be destroyed at the debtor‟s expense the things done in violation of the debtor‟s obligation to refrain from doing such things. Pursuant to sub-article 1 the court may, upon creditor‟s application, authorize the creditor to do or to employ third person to do what the debtor has failed to do at the cost and expense of the debtor. Pursuant to sub-article 2 the creditor may be authorized to destroy or to employ third person to destroy the things done by the debtor in violation of his obligation not to do such things. The cost and expense of such destruction shall be borne by the debtor. Court authorization is, however, indispensable for substituted performance. With out such authorization, the creditor can not recover the costs and expenses from the debtor. Articles 2330 and 2333 on law of sales are in the same line with concepts under Arts.1776 and 1777(1). Under Art. 2330, the buyer may not demand forced performance in conditions where purchase in replacement is possible for the buyer. The same is true Page | 134 for the seller when the buyer refuses to take delivery and pay the price. Here, the seller may not demand forced performance in circumstances a thing in respect of which a compensatory sale is imposed by custom. Sub article (2) of this provision confirms substitute performance of obligation not to do. The creditor can destroy or get destroy the things made in violation of the obligation to refrain from doing such things with court authorizations at the debtors expense. If for instance, Ato Belay fails to dig a well, the debtor can have dug the well by any one at Ato Belay's expense up on court authorization. If Ato Belay's obligation was to refrain from erecting a building and fail to do so by erecting a building, the creditor can have the building destroyed or destroy himself. Such act shall be made upon court authorization at the expense of the debtor. Article 1778 also deals with substituted performance in respect of obligation to deliver fungible things. It reads: Where fungible things are due, the creditor may be authorized by the court to buy at the debtor‟s expense the things which the debtor assumed to deliver. Where the fungible things are due the debtor may have substituted performance be made up on court authorization to buy the thing at the debtors expense. If Mr. A fail to perform his obligation of delivering 500 quintal of sugar in due time, the creditor may buy the agreed amount of sugar from the market upon court authorization. The increased cost due to non-performance of the first contract of the sugar would then be covered by the debtor if any. The provisions of Articles 1779-83 also are aspects of substituted performance but they apply in different circumsatances; when the debtor is ready to perform but unable to discharge his obligation either because the creditor refuse to accept performance or the Page | 135 creditor is unknown or uncertain or where delivery cannot be made for any reason personal to the creditor. In all these situations, the debtor has no fault; ready to perform but prevented from performing. Thus, the law allows him to discharge his obligations by depositing the thing or money at such place as instructed by the court. This will relieve the debtor from his obligations. However, the deposit shall be made upon court order and the debtor shall obtain a court confirmation as to the validity of the deposit. 4.3.3 Cancellation Cancellation is another remedy for non-performance. Cancellation brings an already existing contract to an end. What is the difference between invalidation and cancellation? Cancellation may take two forms-judicial or unilateral. Normally cancellation results from court order. However, there are exceptional circumstances where the party affected by non-performance may unilaterally declare cancellation with out the need to go to court. A) Judicial Cancellation As a rule, cancellation of a contract can take place through court action. The party who claims cancellation as a remedy of non-performance shall bring an action to that effect. Articles1784 and 1785 deal with the conditions under which a court may order the cancellation of the contract. Article 1784 reads: A party may move the court to cancel the contract where the other party has not or not fully and adequately performed his obligations within the agreed period of time. A party affected by non-performance may apply to a court requesting it to order the cancellation of the contract. However, it is important to note that a party has applied for cancellation does not necessarily mean that the court will order cancellation. The court may order the cancellation of the contract or not after her the parties and considering the circumstances of each case particularly in light of the conditions stated under Article Page | 136 1785. This in short means that not all non-performances will lead to cancellation. Article 1785 reads: The court does not cancel a contract when an action is brought to this effect for simply there is non-performance of a contract. The court has mandatory obligation to consider the good faith of the parties. Article 1785 has put the importance of good faith to guide the court in settling on either to order cancellation or not. Art. 1785. – Good faith. (1) In making its decision, the court shall have regard to the interests of the parties and the requirements of good faith. (2) A contract shall not be cancelled except in cases of breach of a fundamental provision of the contract. (3) No contract shall be canalled unless its essence is affected by non- performance and it is reasonable to hold for such reason that the party requiring cancellation of the contract would not have entered into the contract without the term, which the other party has failed to execute being included. This article instructs courts to consider a number of things before it render its decision. The court is required to consider good faith and the interest of the parties. The court is particularly prohibited from declaring the cancellation of the contract where the breach is not fundamental. The burden of proof rests on the party who requires cancellation. The party requiring cancellation shall establish that his interest is substantially affected by the failure of performance. Minor deviations from the terms of the contract may not be sufficient to cancel the contract. For example, the debtor‟s delivery of a quantity less than the quantity agreed up on might not always lead to cancellation. If the discrepancy is small, it is better to resort to other remedies that canceling the contract. In the same way, if the debtor who has delivered a defective thing agrees to deliver a thing free of defect, it would be a violation of good faith for the creditor to refuse to accept; and thus the court may decline cancellation. Page | 137 B) Unilateral cancellation Unilateral cancellation connotes cancellation of a contract by one party without going to court of law. The law recognizes & gives effect to the automatic right of parties to cancel contract in certain circumstances. The circumstances under which a party affected by non-performance can unilaterally cancel a contract are dealt with under articles 1786- 1789. We have such four circumstances, and discuss them separately. (a) The first case, as indicated under article 1786, is where there is a cancellation clause in the contract. Article 1786 reads as: A party may cancel the contract where a provision to this effect has been made in the contract and the conditions for enforcing such provision are present. This provision is a reaffirmation of freedom of contract. The parties can incorporate a cancellation clause in their contract. Thus, the law recognizes unilateral cancellation made according to the cancellation clause. It relieves parties from going to court and also avoids litigation and court workload. (b) the second cases relate to cases where the debtor has failed to honor certain time limits. It is important to note that not all lapses of time limits would lead to unilateral cancellation. Article 1787 reads: A party may cancel the contract where the other party has failed to perform his oblations within the period fixed in accordance with Art. 1770, 1774, or 1775 (b). According to this provision, the debtor‟s failure to perform his obligations within the time limits set by the cross-referenced articles 1770 (i.e period of grace), 1774 (I.e period fixed in the default notice), and articles 1775 (b) (obligations that are such that they must be performed within the time fixed) would entitle the creditor the contract unilaterally. (c) the third case is where performance becomes impossible. Article 1788 reads as: Page | 138  A party may cancel the contract even before the obligation of the other party is due where the performance by the other party of his obligations has become impossible or is hindered so that the essence of the contract is affected. This provision envisages situation where performance was possible at the time of the making of the contract but which becomes impossible afterwards. This is usually referred to as intervening impossibility, and different from that found under article 1715. The impossibility under article 1715 affects the validity of the contract and its remedy is invalidation. However, the impossibility under article 1788 occurs after formation but before performance, and as such affects performance, and its remedy is cancellation. Assume the debtor has agreed to deliver a specific object which existed at the time of the contract. However, the thing is destroyed beyond repair before the debtor delivers the thing. It now becomes impossible for the debtor to perform his obligation. Thus, the remedy for the creditor is to unilaterally cancel the contract. The creditor can do this even before the due date simple because there is no point in waiting the arrival of the due date. However, the impossibility shall affect the essence of the contract as in the example above. (e) the last case where unilateral cancellation can be invoked is the case of anticipatory breach of contract. Article 1789 reads as; (1) A party may cancel the contract where the other party informs him in an unequivocal manner that he will not carry out his obligations under the contract. (2) The party who intends to cancel the contract shall place the other party in default and the contract shall not be cancelled where the party in default produces with in fifteen days securities sufficient to guarantee that he will perform his obligations at the agreed time. (3) Notice shall not be required and the contract may be cancelled forthwith where a party informs the other party in writhing that he will not perform his obligations. Page | 139 When one of the parties an unambiguously communicates his refusal to perform, the other party may unilateral cancel the contract if he chooses. However, the party intending to cancel the contract shall give default notice to the refusing party. The refusing party may prevent the cancellation of the contract by furnishing, within fifteen days, sufficient security to guarantee that he will perform his obligations as agreed. So, here we expect a change of mind of the debtor; but not mere change of once mind but completed with the furnishing of securities. Nevertheless, if the refusal is communicated in writing, the party intending cancellation is not required to give default notice, and he may immediately cancel the contract. To conclude, the Ethiopian law of contract provides cancellation-judicial or unilateral-as one remedy for the party affected by non-performance. By so doing, the contract comes to an end. What then is the consequence of cancellation? Articles 1815 and following provisions deal with this question. The most important consequence is that the parties shall be reinstated in the position, which would have existed, had the contract not been made. The implication is that what ever the parties have performed in pursuance of the contract has no effect, and what they have paid or delivered shall be returned. Thus, by canceling the contract, the party affected by non-performance may claim back what he has paid or delivered. However, this may not be sufficient to satisfy him because he may have lost a benefit he could have gained from performance. In this case, he may claim compensation in addition to cancellation. 4.3.4 Damages (Compensation) Damages/Compensation is another remedy for a party affected by non-performance. The Ethiopian law of contract provides damages/compensation as a remedy under articles 1771 (2) and articles 1790-1805. The purpose of compensation for non-performance is to put the victim party in a position he would have been had the contract been performed. The reading of 1771 (2) suggests that damages/compensation is an additional remedy. However, if we read this provision cum 1790, it becomes clear that under Ethiopian law Page | 140 damages can be claimed as an additional or alternative remedy. Article 1790 dealing with damage arising out 0f non-performance reads as: (1) Apart from or in addition to the enforcement or cancellation of the contract, a party may require that the damage caused to him by the other party failing to perform his obligations be made good. (2) Without prejudice to the provisions of the following articles, the provisions of the Chapter of this Code relating to “Extra-contractual Liability” shall apply where the damage is made good under sub-art. (1) (Art.2090-2123). Sub-article 1 of this provision clearly states that damage can be claimed as alternative to enforcement and cancellation or additional to them. In addition, the provision states that a party is entitled to compensation only if he /she has incurred loss or damage as a result of non-performance. The central notion here is no loss, no compensation. So, a party has to show that he has incurred loss/damage plus that this loss/damage resulted from non- performance. Sub-article 2 instructs courts to apply the relevant provisions of extra- contractual liability to cases where damages are claimed. Article 1791 sub-article 1 provides that “ the party who fails to perform his obligations shall be liable to pay damages notwithstanding that he is not at fault”. This provision suggests that compensation shall be due where there is non-performance even if the debtor is not at fault. It is a very important provision because, the law says the absence of fault cannot be a defense against the claim for compensation ( at least in principle). However, it shall be read in conjunction with sub-article 1 of article 1790, which suggests that not all non-performances lead to the award of compensation. The creditor must show that he has incurred loss or damage as a result of non-performance. If he shows that, he is entitled to compensation the amount of which shall be assessed according to the provisions of 1799-1805. So, it will be important that defenses are available for the party required to pay compensation. He has basically two defenses. The first defense is the absence of fault. As a general rule, the absence of fault is no defense to the claim of compensation (see article Page | 141 1791 (1)). However, there are certain exceptions to this. We find them under articles 1795 and 1796 where in the plaintiff has to proof fault or grave fault on the part of the debtor. This implies that if the plaintiff fails to proof that the debtor has committed fault or grave fault, as the case may be, he will not succeed in claiming compensation. The other defense for the debtor is force majeure. 1791 (2) states that “ [the debtor] shall not be released unless he can show that performance was prevented by force majeure”. The acontrario reading of this provision suggests that the debtor is released of payment of compensation if he can show that performance was prevented by force majeure. Article 1792 provides the criteria for determining what constitutes force majeure, while article 1793 provides list of specific cases that constitute force majeure. On the other hand 1794 provides list of specific cases that do not constitute force majeure. However, it is important to closely look at the extent to which the parties may include or exclude an event as force majeure. It is also important to note force majeure that occurs after the debtor is put in default cannot release him of his obligation to pay compensation (see 1798). In addition, the law imposes obligation on both parties to minimize the effects of non-performance (1797 & 1802). To conclude, a party who has incurred loss or damage as a result of non-performance may claim compensation by showing his loss/damage and that this is the result of non- performance. The purpose of such damage is to put the victim party in a position would have been had the contract been performed. Normally, the creditor is not expected to proof that the debtor was at fault. However, in certain circumstances he has the duty to show the fault or grave fault of the debtor (see 1795 & 1796). If he fails to do that he will not succeed in claiming compensation. The crucial defense for the debtor is force majeure; however, force majeure occurring after being in default is no defense. In addition, the debtor may contest the amount of damages awarded. Once, the liability of the debtor for damage is determined, the next question is to assess the amount of compensation (damages) to be paid to the creditor. Compensation is to be assesses according to the rules of Articles 1799-1805. The basic principle is that compensation shall be equal to the damage/loss which non-performance would normally Page | 142 cause to the creditor in the eyes of a reasonable person (see Art.1799 (1)). Thus we have objective criteria for assessing damage, and the question not how much a particular creditor has lost but how much a reasonable person as a creditor would have lost as a result of non-performance. However, there are lots of exceptions in the provisions that follow. A very important point to note is that in case of money debts, a creditor is entitled to compensation at the rate fixed under 1803 & 1804 without the need to prove the extent of loss/damage he has sustained as a result of non-performance. However, the creditor may claim more compensation if the compensation to be assessed according to 1803 & 1804 are not adequate for the greater damage/loss he has sustained (see Article 1805). Further Reading Materials Books  Richards, Paul Law of Contract 7th ed.2006 P. 306-342  Trietle, G.H the Law of Contract 11th ed. 2005  Sujan, M.A. Interpretation of Contract 2nd Ed. 2000 P 179-337  Kreczunowicz, George Formation and Effects of Contracts in Ethiopian Law 1983  David, Rene, Commentary on Contract in Ethiopia an English Translation by Michael Kindred Cases  Aster Araya vs.Girma Wodajo, Federal Cassation Court, File No.17191 Hamle 29, 1997  Ethiopian Development Bank vs. Abdurrahman Telisa, Federal Cassation Court, File No.15662, Megabit 13, 1999. Page | 143