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THE THEORETICAL FOUNDATIONS OF CONTRACT LAW

ON THE THEORETICAL FOUNDATIONS OF CONTRACT LAW

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

“The Law of Contracts may be described as the endeavor of the State…. to establish a positive sanction for the expectation of good faith which have grown up in the mutual dealings of men of average right-mindedness… He who has given the promise is bound to him who accepts it, not merely because he had or expressed a certain intention, but because he so expressed himself as to entitle the other party to rely on his acting in a certain way.” Sir Fredrick Pollack

I. OBLIGATIONS IN GENERAL

a. General

i. In the Civilian legal tradition, private law is categorized into three major fields of study – the law of status, the law of things and the law of obligation. The study of the law of contracts is just an aspect of the law of obligations. This classical distinction is somewhat reflected in the structure and contents of the 1960 Civil Code of Ethiopia.
ii. Books One (On the Law of Persons) and Two (On the Law Family and Successions) are essentially the domain of the Law of Status; Book Three (On the Law of Goods) is that of the Law of Things; while Books Four (On Obligations) and Five (On Special Contracts) are in the realm of the Law of Obligations.
iii. The above classification is not in the nature of a water tight compartment as there are many instances whereby a provision in one category may jump into another and vice versa.

b. Scope of obligations. In jurisprudence, obligation is that part of the law which creates rights in personam as opposed to rights in rem. In most cases, obligations arise from the actions of the obligor, either by an act to which he freely consented or by a faulty conduct on his part or on the part of another. An obligation thus denotes acts or forbearances which one is bound to perform in favor of another or refrain from performing in the interest of another.

c. Some Accepted Definitions of Obligations

i. “A legal bond by which by which one person is constrained towards another to do or not to do something.” Planiol.
ii. “A legal bond between two persons in virtue of which one of them is bound, in favor of the other, to do a certain act or to abstain from doing an act so as to create a right over a thing or to transfer the ownership of a thing.” Amos and Walton.
iii. “That which a person is bound to do or forebear, … that which constitutes a legal or moral duty and which renders a person liable to coercion and punishment for neglecting it.” Black’s Law Dictionary.

d. Sources of and Parties in Obligations

i. Normally, the sources of obligations are the law or the action and/or promise of the holder of the obligation.
ii. Those that stem from the actions of the parties are primarily contracts. In other words, such obligations are referred to as contractual obligations.
iii. Extra contractual obligations may have the law, the faulty conduct of the obligor and the actions of third parties for whom the obligor is answerable as their sources.
iv. In most instances, obligations create a creditor-debtor relationship between the persons bound by them. He who has a claim over another is known as the creditor, while he who is liable to the claim of the creditor is called the debtor. But we need to examine the corresponding rights and obligations of the parties before stating this party is a creditor and that a debtor. If one takes, a contract of sales, for example, the seller is a creditor regarding payment of the agreed upon price while he is a debtor when it comes to delivering the item sold to the buyer; and vice versa.


II. THE NEED FOR CONTRACTS

a. Social interactions. No one can live in a solitary world of his own and this state of affairs calls, among others, the need for creating and fostering economic relationship.

b. Division of labour. One cannot be self contained in satisfying all his needs and those of his immediate family. This necessitates an act of bargaining to get the goods and services of others in consideration of discharging some kind of obligation on one’s part.
c. The necessity of social regulation. As in all other walks of life there may ensue disputes in the course of these interactions – hence bringing society’s desire to control and regulate human actions and inactions stemming from these economic relationships. The basic features of the relationships have to be defined; the effects thereon need to be spelt out; modalities of creating as well as terminating the relationships must be put in place; and the means of ensuring the rights and obligations of the parties should be devised. Addressing these and other issues is the domain of contract law.

III. MEANING OF A CONTRACT.

a. Theory of expectation and reliance.

It can safely be argued that the law of contract is the most important aspect of the general law of obligations. The expectations engendered by the promisor; and the promisees reliance upon the promise. The primary goal of the State in this regard is to ensure that he who has give a promise to another of his own assent is bound to him who has accepted it since the former has so expressed himself to entitle the other part to rely on the promise.

b. Other theoretical Issues.
i. A contract is an agreement and, as such, requires the prevalence of two or more parties. It must also be seen to it that there is a meeting of minds of the contracting parties on the subject matter of the agreement. Intentio obligandi.
ii. But not all agreements are contracts. A contract essentially differs from other consensual agreements in that the parties express their desire to be bound by their promises. This is not the case in agreements that are not regarded as contracts under the law.
iii. It can thus be concluded that all contracts are agreements but not vice versa.
iv. The underlying policy considerations of the law of contracts. (The notion of Pacta sunt servanda. Freedom of contract v. security in transactions.)

  1. The sovereignty of the human will and the sanctity of promise.
  2. Private autonomy. Parties are delegated by the state to make their own laws with respect to the relationship they intend to create in a contract.
  3. Needs of business. Once it is affirmed that parties have freely consented to the making of a contract, the full force of the law backs its enforcement for the smooth functioning of business requires so. This is what is known as the theory of security in transaction.

c. Definition of Contract in the Civil Code. Art. 1675. “A contract is an agreement whereby two or more persons as between themselves create, vary or extinguish obligations of a proprietary nature”. This definition is loaded with important conceptual issues of the law of contract.
i. A contract is an agreement. See the explanation above on the distinction between an ordinary agreement and a contract.
ii. A contract presupposes the interaction of at least two people. (Plurality of parties.) It is very unlikely to anticipate a situation whereby one may contract with himself. It is the minds of at least two persons that meet – thereby creating the contract. The persons may be physical (natural); or Juridical, grouping incorporated under the law on whom are bestowed the rights of personality.
iii. A contract is created as between the parties to it. The principle of relativity of contract (privity as the British call it) has it that no one may be bound by nor claim a right on the basis of a contract to which he is not a party. Present day reality has, however, brought about substantial changes to this general rule.
iv. The subject matter of a contract needs to be proprietary (property related or economic). Social and moral obligations are not as a rule subject to the law of contract. Nevertheless, it is important to take note of the fact that there are other contracts that entail obligations: – E.g. Agreements to marry; agreement of adoption or agreements for contracting away paternity.

d. The purpose of a contract may be:

  1. To create obligations – a new deal.
  2. To vary obligations – improvement or modification of an already existing deal.
  3. To extinguish obligations – agreement to bring an existing deal to an end.

IV. CLASSIFICATION AND TYPES OF CONTRACTS:

a. Classification. Contracts may be classified into different categories depending on their contents, forms or modalities of their preparation. The following are some examples.
i. Contracts that entail bilateral and unilateral obligations. These kinds of contracts are sometimes referred to as contracts based on onerous title and those based on gratuitous title.
ii. Commutative and aleatory contracts. Contracts with simultaneous performance and those that call for performance of some or all of the obligations of one or both parties at some later time.
iii. Solemn and consensual contracts. Contracts that are required to be made in a special form and those that are not.
iv. Contracts of adhesion and contracts of consultation. These are contracts whose contents are drawn up by one party and subscribed to by the other; and those whose contents are outlined by free and express consultation of both.
v. General and special contracts. Contracts that are made on the basis of day-to-day business needs and those that are required to comply with special rules of the law for their making and consequences.
vi. Valid, voidable and void contracts. Contracts that are made in compliance with all legal requirements and hence duly enforceable; those that are defective but subject to be remedied by the party concerned; and those that are so defective that neither of the parties can bring about their validity.

b. Types of contracts under Ethiopian laws. It is in deed very cumbersome to tell the types of specialized contracts that one comes across in the multitude of Ethiopian laws.
i. In the Civil Code, for example, we have:

  1. Contracts relating to the assignment of rights such as contracts of sale, donation or loan.
  2. Contracts for the performance of services such as contracts of employment, construction contracts, contracts for intellectual work or publishing contracts.
  3. Contracts for the custody, use and possession of chattels such as contracts of loan for use, those on bailment or contracts of pledge.
  4. Contracts that relate to immovable property including contracts for sale, lease or mortgage of immovable property and those on works and labor on those types of properties.
  5. Administrative contracts and special requirements of formation and effects such contracts.
  6. Contracts on compromise and arbitral submission.
    ii. In the Commercial Code, we got:
  7. Contracts on sale, hire and mortgage of business.
  8. Contracts on formation of business organizations.
  9. Contracts of carriage and insurance.
  10. Contracts relating to negotiable instruments.
  11. Contracts on banking transactions.
    iii. In other laws too, we have contracts of employment, collective bargaining, intellectual property and cyber contracts. The limit is boundless.

V. SCOPE OF APPLICATION OF THE GENERAL PROVISIONS OF CONTRACT LAW ON SPECIAL CONTRACTS AND OTHER OBLIGATIONS.


The theory of complementarity. Arts. 1676 and 1677, Civ. C.

a. When it comes to contractual obligations, the general legal principles on the formation, effects and extinction apply not only to general contracts that are fully regulated by Title XII of the Code, but also to all varieties of contracts that we find in Book V of the Code on Special Contracts and those in the Commercial Code and other laws. The most important point to take note of in this context is that this principle that is espoused by Art. 1676 of the Code applies to the extent that the matter to be regulated is not covered by specific legal provisions to be found in the province of the special law of which it forms a part. This is compatible with the general rule of interpretation of law known as special provisions of the law derogate from the general ones.

b. The scope of Title XII goes further than regulating obligations that stem from contracts but also obligations that have extra contractual sources so long as the matters are not specially covered by a different law designed for its regulations. Art. 1677. See. For example, Civ. C. Arts. 756, 867, 991, 2143, 2146(2), and 2155.

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