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THE CONTRACT FORMATION PROCESS

ON THE CONTRACT FORMATION PROCESS

Tilahun Teshome (Prof.), AAU, School of Law, 2012-2013 A.Y.

I GENERAL REQUIREMENTS

a. A contract is a juridical act and as such requires living up to certain standards of behavior in order for it to be able to bind its actors in the eyes of the law. These standards are outlined under Art. 1678 of the Code.
b. Capacity: The ability to perform acts sustainable under the law.
c. Consent: The free expression of one’s willingness to enter into contractual obligations.
d. Object: The subject matter of the contract.
e. Form: Whenever required by the law or parties so agree, a contract may be made in a form prescribed by the law or agreed upon by the parties.

II CAPACITY TO CONCLUDE A CONTRACT

f. In general terms, the notion of capacity is not in the realm of the law of obligations of which the law of contracts is a part. It is rather an important legal principle of the law of status and refers to the ability of a person, whether natural or juridical, to perform an act that is sustainable (acceptable) in the eyes of the law. Although a person may have a particular right, he may not have the capacity to exercise it.
g. Such is the case of a child under eighteen who may own some property but who cannot contract on the same.
h. It is likewise the case with persons of unsound mind who are not in a position to fully appreciate the consequences of their actions.
i. In the olden days, convicted criminals, persons with disabilities, slaves, those who join the holy order (such as monks) and even women used to be considered as being incapable.
j. Modern law presumes capacity. It means that unless proved to the contrary, every human being is considered to have the required capacity to enter into juridical acts including, of course, the power to conclude contracts.
k. Bodies corporate are also subject to the rule of capacity. Their capacity may relate to their objective or to their nature. Conditions may also be imposed upon incorporation with regard to the activities they may venture into. The law may restrict the activities to be undertaken by these organs.
i. Political parties may not engage in trade.
ii. Religious institutions should not enter into politics.
iii. Companies may only carry out activities for which they are licensed.
iv. There are also areas of capacity that are subject to rules on special incapacity. E.g. Foreigners may not engage in investment areas preserved for nationals. They may not own immovable property. Bankrupt persons may be restricted from involving in business activities for a certain period. Government officials should not venture into business areas that are incompatible with their offices.

III CONSENT

l. The theory of consent is a fundamental principle that goes into the heart of any contract. Contracting parties are said to have willed the effects of a contract when it is seen that they have really expressed their desire to that effect. Read the provision of Art. 1679 of the Civ. C. in this context.
m. The consent of the parties to conclude a contract decomposes itself through a process known as offer and acceptance.
n. Offer in the law of contracts is a promise or a commitment of one party to do or to refrain from doing some specified thing and creates a power of acceptance on the offeree (the person to whom the offer is made) that would transform the offer into a binding obligation.
o. Acceptance. “An acceptance is a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer, and thereby creates the set of legal relations called a contract.” Corbin. At the beginning, the offeror has full power to determine the acts that may constitute acceptance. Once he makes the offer, however, the power to transform it into a binding contract shifts to the person making the acceptance.
p. Forms of offer and acceptance.
i. General rules. See Arts. 1681 and 1682. They can be made in writing, orally, by conduct or by signs normally in use. As a matter of principle, however, silence of a person to whom an offer is made does not constitute acceptance.
ii. Exceptions to the rule of express acceptance. See Arts. 1682 to 1686 where there is/are:

  1. a duty to accept – a typical example in this regard is the responsibility of companies that provide public utilities and those that are engaged in financial services.
  2. a prior business relationship between the offeror and the offeree – a case in point is an offer made by a lessee to a lessor to elongate the contract of lease for a further period; such is also the case where an insured requests the insurer to extend the insurance cover for another term.
  3. an invoice based transaction in which particulars other than the sum regarded as payment that are not congruent with the terms and conditions of the main contract; and
  4. general terms of business referring to standard contracts that are not expressly accepted by the offeree or that are not endorsed by the relevant public agency.
    q. Binding and Non-binding Declaration of intention.
    i. Mere declaration – advertisements, discounts, call for negotiations, circulation of catalogues and price tariffs that are not expressly directed to a designated person. See Art. 1687.
    ii. Sale by auction – a special kind of offer whose acceptance depends on the results of a bid that designate the winner. Art. 1688.
    iii. Public promise of reward. Art. 1689.
    r. Miscellaneous issues on offer and acceptance. Arts. 1690-95
    i. Offer with or without time limits.
    ii. Counter-offer
    iii. Withdrawal of offer and acceptance.
    s. Defects in consent. It is common knowledge that in order for a contract to produce the desired effect and bind the parties, it must be seen to it that it is free from any and all defects that vitiate the free expression of will of its actors. This idea goes deep into the very foundation of the law of contracts – freedom of bargaining. It must be established that consent is given truly and consciously. A contract that suffers from such defects is susceptible to invalidation, i.e. being deprived of the protection of the law for its enforcement. As in almost all other contract law regimes, the Ethiopian Civil Code too lays down the grounds that constitute defects from the vantage point of consent. See Arts. 1696-1710 in general. These are mistake, fraud, duress and, under exceptional circumstances, unconscionablity.
    i. Mistake. (Arts. 1697-1703) Mistake in the law of contracts is referred to a wrong appreciation of a material fact in the terms and conditions of a contract by one of the parties. It must be substantial enough to be considered by a reasonable person that the mistaken party wouldn’t have entered into the contract were it not for the mistake.
  5. Mistake as to the subject matter.
  6. Mistake of identity.
  7. Mistake on the cause that gave rise to the contract.
  8. Non-fundamental mistakes.
    ii. Fraud. (Arts. 1704 and 1705) Fraud relates to deceitful acts of one party committed on the other on the basis of which that other party agreed to conclude a contract. For it to enable the victim to demand invalidation of the contract, the act of the recalcitrant should relate to a matter substantial to the bargain so much so that he wouldn’t have entered into that contractual arrangement were he not deceived. The fraud may relate to:
  9. Material misrepresentation of the subject matter of the contract or the identity of the contracting party. A false statement. Commission and;
  10. Concealment of a material fact that ought to have been disclosed to the other party. An omission.
  11. Fraud may also have tortuous and/or criminal consequences.
    iii. Duress (Arts. 1706-09). In the ordinary course of events, any wrongful act or threat that overcomes the free will of the parties in consenting to contract formation can be considered as duress. It is also required to be of such a nature and severity that a reasonable person would not have concluded the contract if it were not for the act of duress. The following are additional points to be taken into account in this regard.
  12. The danger to which the victim is exposed must be clear and imminent.
  13. The person subject to the duress may be the contracting party himself or those to whom he owes support and protection.
  14. The coercion may be on the person, property or prestige of the victim or those to whom he owes allegiance.
  15. The form of duress may be direct, indirect, physical or psychological
  16. The person exercising the duress may be one of the parties to the contract or some other person who coerces the victim to enter into the contract with or without the blessing of that party.
  17. A threat to exercise one’s right does not amount to duress unless it is so excessive that the party availing himself of such threat has made an undue advantage against the other party.
  18. Reverential fear does not count unless excessive.
    iv. Unconscionablity. The expression “unconscionable” is not actually a legal term but a notion of morality that is employed to denote an act that affronts human sense of decency. In contract law, it is generally held that an unconscionable contract is a contract in which one party takes an excessive advantage over the other by exploiting his dire need, ignorance of the bargaining process, business inexperience or similar other weaknesses. This is regarded as a contractual obligation which no reasonable debtor would assume and no humble and honest creditor would claim.(Art. 1710)
  19. As a matter of general principle of law, the prevalence of gross unproportionality per se in a contract does not bring about its invalidity.
  20. The elements of want, simplicity of mind and manifest business inexperience that are stated under Sub-Art. 2 of Art. 1710 are required to be met.

IV SUBJECT MATTER OF A CONTRACT

a. The Basic Issue. The doctrine of freedom of K has it that parties have full measure of autonomy to determine the subject matter of their K. This is, of course, without prejudice to limited exceptions imposed by the law in consideration of the general public interest. See Civ. C. Art. 1711. Questions such as: With whom to conclude a K? How to conclude? What its terms and conditions may be? In what ways should the obligations be performed? What additional means of guaranteeing performance should be ensured? What civil sanctions should be imposed on a recalcitrant? What form should communications of the parties assume? In what ways may disputes stemming from the K be resolved? And similar others are, by and large, left for the parties to regulate. The purpose of the law is to lay down general guidelines that are meant to help parties when they contemplate of concluding Ks. The provisions of the law are mostly permissive in nature in the sense that they can be derogated from by the parties.
b. Determination of Object. As pointed out earlier, the subject matter of a contract is the creation, variation and extinction of obligations of a proprietary nature. Parties to a contract normally agree to do something, to refrain from doing something or to handover something. Take the case of a contract of sale: Buyer’s obligation is to pay the price and take delivery of the thing. Seller’s obligation, on the other hand, is to deliver the thing. The reason for the buyer’s payment of the price is the agreement of the seller to sell the thing and vice versa. The nature of the transaction here is to give the money (buyer) and to give the thing (seller). Take again the case of a service contract: Client’s obligation is to pay the agreed service charge (obligation to give). Service provider’s obligation is to perform his duty as agreed (obligation to do). In an obligation not to do, a person may relinquish making make use of his right in consideration of a price or some other benefit. Such is the case of one who agrees not to make use of his title over a piece of property against payment of royalties or other remunerations. It is thus this obligation to do (commission) or not to do (omission) that, in the parlance of the law, is known as the object of a contract. See Art. 1712
c. Features of Object.
v. It must be defined – Must be good enough to enable others understand the respective rights and obligations of the parties. What is the contract all about? We need to get the answer to this question from the contract itself. It is not up to the court or any other third party to tell what the parties intended to agree on. (Art. 1714)
vi. It must be possible – Must be capable of being performed by the parties with little or no difficulty. Impossibility may be that of fact or that of law. It may be pre or post contract. (Art. 1715)
vii. It must be lawful – No contract can stand where its object is infringement of the law. One cannot agree to commit or not to commit a crime. In both cases he does not have a right to give his consent. (Art. 1716)
viii. It must stand the morality test – The law also speaks of immoral contracts but remains short of telling us what it means by morality. Not all people would entertain similar views on what constitutes immorality with respect to a certain conduct. At times, it is exposed to subjectivity of judgment. Factors such as culture and religion also influence our perception of morality. Despite that, however, there may be areas of morality that a given society may take for its own. (Arts. 1716 and 1718)

V FORM OF CONTRACTS

t. The Rule – Contract laws do not require observance of specific formalities in all cases. In fact, the majority of our daily economic dealings that are contractual in nature are done in a consensual manner, there being no need to adhere to any specific formal requirements. Consider the provision of Art. 1719 of the Code that reads as follows: “Unless otherwise provided, no special form shall be required and a contract shall be valid where the parties agree.” The question then is: Who may provide “otherwise”? A short answer to it is: The parties themselves or the law.
u. Form stipulated by the parties (Arts. 1719/1 and 1728). In as much as parties are at liberty to determine the object of their contract, so are they at liberty to agree on a particular form their agreement should assume.
v. Form Required under the Law (Arts. 1723 – 1725)
i. Taking into consideration the volume of transaction in a contract, the nature of the bargain, the duration in which the contract is supposed to last, the number of parties, issues of public interest that is likely to be involved in the contract and similar other matters, the law may specify a fulfillment of a particular formality for conclusion of a contract. To mention but a few, the following are such instances:

  1. Contracts relating to immovable property;
  2. Contracts of guarantee;
  3. Contracts of insurance;
  4. Contracts on the formation of business organizations;
  5. Contracts evidencing collective agreements; and
  6. Contracts with public administrative agencies.
    ii. Once a contract is made in a specified form, it may further be required to have the signatures of parties and witnesses unto it; to be attested by witnesses; to seek authentication by public authorities or by private entities so delegated to undertake such businesses; to have it publicized; or to meet governmental duties on licensing and payment of revenue stamps.

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