7.3.2 Contract Law
The law of contracts governs the commercial relationships between parties, typically buyers and sellers of goods, services, and rights. The development of an efficient market requires a clear and predictable law that adequately covers such basic issues as contract formation, obligations of the parties, and available remedies when one party is in breach, as well as more complex issues such as force majeure (natural disasters and other “Acts of God”) and assignment of rights to third parties. However, other components of the legal system are just critical. Contract law is of little practical use if the general legal, business, and government environments act to suppress the formation of efficient commercial agreements.
Ultimately, the law and legal support systems must be sufficient to allow parties to assess and allocate risk. Components of this support system include the legal community’s ability to understand and apply legal principles in the contract drafting and dispute-resolution phases; sufficient information that allows for an informed assessment of risks and obligations; the judiciary’s ability to resolve disputes; the existence of alternative dispute-resolution systems; civil society and the State’s roles in supporting and regulating the commercial sector; and the commercial sector’s willingness to seek legal advice.
Against a backdrop of State support for the needs of commerce, three distinct sectors are needed: a strong, responsible practicing bar; a commercial sector that is at least minimally knowledgeable in legal principles; and civil society support systems.
Though the written law on contracts (the Law of Obligations in the 1960 Civil Code) in Ethiopia is comprehensive and reasonably well thought out, most of the other components critical to an efficient culture of commercial contracts are either non-existent or seriously underdeveloped. Ethiopia’s traditional customary legal system is widely used by individuals and small commercial enterprises and is reported to be reasonably efficient. Individuals with commercial disputes often turn first to the customary system (usually the elders of a community or urban neighborhood), then to the courts only if the dispute cannot be resolved. Judges indicate that they review the findings of the elders as if they had come from a lower court. This state of affairs is not necessarily a barrier to the development of a domestic market system. It is, however, a system which will not be viable for business in the international market, and the dependence upon customary dispute resolution will need to be reduced by individuals wishing to enter the global marketplace.
The 1960 Civil Code was promulgated under Emperor Haile Selassie as a result of national recognition and adoption of a modern legal system. The law is loosely based upon the Code Civil of France (a document that has remained virtually unchanged since Napoleon’s time), but was obviously drafted to reflect some more contemporary notions of contract law.
The Civil Code is law in the civil tradition at its core, but with introduction of some common law principles. For example, there is heavy reliance on the requirement of good faith of the parties (a civil law concept) throughout the law on contracts—in the interpretation of contracts (Article 1732) and in a judge’s authority to make decisions that take good faith into account (Article 1785)—but there is also a seeming preference for the award of damages (Article 1776) over specific performance. With its Book of Obligations (Book IV) covering general contracts, and Book V devoted to the so called Special Contracts, the law on contracts fills a daunting of 275 pages. Most of the familiar concepts of formation, obligations of the parties, remedies, and exceptions to the general rules are found in Book IV.
Five specific types of contracts that are afforded special treatment in Book V are: (a) Assignment of Rights; (b) Performance of Services; (c) Custody, Use, and Possession of Chattels; (d) Contracts for the Sale of Immovables; and (e) Administrative Contracts. There is little interest demonstrated in Ethiopia in acceding to the United Nations Convention on Contracts for the International Sale of goods or in revising the law to conform with, for example, the much simpler UNIDROIT Principles.
B Contract Formation
As with other Civil Law systems, Ethiopia’s Civil Code explicitly requires only an “expressed agreement of the parties” (Article 1680 (1)) for a contract to be a prior valid. As a practical matter, however, the traditional elements of offer, acceptance, and defined subject are also required in order to make a determination that the parties have agreed. Book V has similar formation provisions for the Special Contracts.
No writing is required (Article 1681 (1)), with administrative and immovables contracts. For those contracts that must be in writing, two witnesses are also required and the contract must be registered in a court or with a notary. The Civil Code spells out that unless otherwise agreed, the locus of the conclusion of the contract shall be the place where, and time when, the acceptance is sent (Article 1692).
Article 1695 provides for something like the American “mirror image rule,” requiring the acceptance to substantively echo the offer. Specifically, the Article states that “a contract shall not be deemed to be completed unless the parties have expressed their agreement to all the terms of the negotiation.” The nominal difference is that where, under the mirror image rule, agreement to the terms can be implied from a simple acceptance of the offer, Article 1695 seems to require that there will be some expression of agreement after there has been a final manifestation of the terms.
The doctrine of Mistake is treated in the formation section of the Code, in a group of articles titled “Defects in Consent.” The Code requires the mistake to relate to a fundamental component of the contract, and to be of a type that had the mistake not been made, the mistaken party would not have entered into the contract (Article 1697). This right is, however, cut back by Article 1701, which disqualifies mistakes that relate only “to the motives which led to the making of the contract.” Nowhere in the Code, unfortunately, is there a definition of “motives.” The other defects in content are the typical faults which destroy a contract ab initio, such as fraud, deceit, incapacity, and unconscionability.
C Excuses for Non-Performance
The Civil Code provides both of the common legal defenses for non-performance of obligations—Force Majeure and Suspension of Performance (due to the insecurity of the suspending party). The Force Majeure provisions (Articles 1792–94) require impossibility of performance as the standard, and expressly disqualify excuse where the occurrence was foreseeable or where performance would be possible but financially onerous. Anticipatory breach (Articles 1788–89) is only available where a party “informs [the other party] in an unequivocal manner that he will not carry out his obligations under the contract.”
D Remedies and Enforcement
The closest Code that comes to making warranty provisions are the requirements that “the parties shall be bound by the terms of the contract and by such incidental effects as are attached to the obligations concerned by custom, equity and good faith, having regard to the nature of the contract” (Article 1713), and that “the creditor shall not be bound to accept a thing other than that due to him…” (Article 1745). If these principles are violated, the non breaching party is entitled to either cancel the contract or demand enforcement (Article 1771). It is unclear whether this provision means that the non breaching party may demand conforming performance or if it means that the party may simply keep the contract alive and seek damages. The latter interpretation is supported by the language of Article 1776, which allows the award of specific performance only where it is of “special interest to the party requiring it and the contract can be enforced without affecting the personal liberty of the debtor.” The Code provides for a rather generous 10-year period of limitations.
The Code’s damaged provisions are, as is typical in Civil Law systems, shared by all the breaches of law and agreement that result in civil liability (e.g., torts and contracts). The basic rule for damages is that they should be “equal to the damage caused to the victim by the act giving rise to the liability” (Article 2090). The damages must be foreseeable (Article 2101) and are adjustable according to issues of good faith (Article 2097), which would presumably include unreasonable lack of mitigation of damages by the non breaching party. The law adheres to a “loser pays” system for court costs and attorneys’ fees.
Though the Civil Code provides much of what is necessary to determine the law on contracts, it presents a number of downsides. It is, of course, not a new law. The Civil Code was written with the help of distinguished legal scholars from both Ethiopia and abroad, but lacks features that would make it more efficient. There is very little dynamism to the Code. Moreover, as is pointed out elsewhere in this report, the practical use of the Code was suspended during the Derg, from 1974 to 1991, so opportunities to explore the efficiency of the law experienced a large gap. And, in the post-Derg period, such tight controls on commercial activity have been in effect—especially on international commerce—that the law remains largely untested. The Code itself contains flaws that would certainly have a chilling effect on its use without significant judicial and scholarly analysis made widely available to the practicing bar and the business community. For example, important terms and phrases are left undefined. No legislative history is available to clear the confusion, and little scholarship is made available, almost none in English. An Ethiopian judge said that he often uses a commentary that was written on the Code of Civil Procedure.
Though court decisions and, in some cases, judicial opinions are supposed to be transcribed and made available, the number and thoroughness of the opinions to be released is left to the court. No efficient system is in place for the publication of opinions. Because of this lack of informational infrastructure, contradictions in the written law go unresolved and lead to potentially higher risk and uncertainty for parties to agreements. For example, though the Code expressly allows unwritten contracts, Article 1728 requires “any party bound by a contract [to] affix his handwritten signature thereto.” Though it can be reasonably assumed that this would apply only in cases where a written contract has been done, there is no disinterested authority that can provide such logic to a judge.