Business Law Power Point

Introduction…cont`d
1.1: Defining the Concept Law

• Different legal scholars define law differently depending on the
objectives that they have.
• As a result, there is no conventional definition of law but there is

workable definition based on the objective that it has.
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Introduction….cont’d
The reasons are, there are different:
social interactions:
• interests,
• political views,
• ideology or out looks,
• religions,
• cultures,
• languages,
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BUSINESS LAW
By: Seyoum Teka
Chapter One: Introduction to Law
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Introduction….cont’d
• customary practices,
• or traditions, etc.,
• that influence not to have conventional definition of law rather
• there may be workable definitions of law.
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Accordingly, the following are some of the definitions of law given by

different scholars:
• Law has been defined as rules and regulations established by
government and applied to people in order for civilization to exist
(American realism)
• Law is a body of rules for human conduct set and enforced by a
sovereign political authority (Thomas Hobbes and John Austin)
• Law is a body of rules for human conduct with in a community which
by common consent of this community shall be enforced by external
power (Apothem)
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• Law is the command of the sovereigns to be backed by sanction (John
Austin)
• Law is an obligatory social rule by the public authority permanently
and sanctioned by force (planiol)
• Law is a means of dominating and exploiting the society (Marxian)
• Law is defined as a body of principles recognized and applied by the
state (Salmon A.).
1. Some define law according to its characteristics (positive School).
• A characteristic is the existing law or positive law.
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2. Some of them define law according to its content (Natural School).
• They say just law is a law but unjust law is not a law.
3. Some others define law according to its actual operation or function.
• They focus on how the law actually serves the society not on how and
who made the law (Functional School).
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1.2: Understanding Theories of Law
1.2.1: Natural Law Theory
• Natural law theory is the oldest theory of law that dated back to the ancient
Greek philosophers.
• In the past, there was no distinction among law, religion and moral because
law was defined in relation to the Devine will.
• It defines law based on its content.
1.2.2: Imperative/Positive Law Theory:
• It is sometimes known as positive or analytical law theory.
• The Greek philosopher Aristotle (384-322 BC) was the philosopher who
made a distinction between natural law and positive law.
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• It defines law based on its characteristics.
1.2.3: Sociological/Functional Law Theory:
• The prominent and influential American Jurist, Roscoe pound (1870-
1964)
• It saw law as an attempt to balance social interests with individual
interests. It defines law based on its function.
• To him law is the product of the society, and
• its purpose or function shall be to balance conflicting interests and
considered law as social engineering.
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1.3: Basic Natures of Law

1.3.1. Law has Generality
• Law is enacted in general form not in a specific form
• Example: Article 3 of the UDHR says ‘everyone has the right to life,
liberty and security of person.’
1.3.2. Law Regulates Social Behavior
• Law regulates general human behavior not individual behavior
• Example: Think of somebody took away your wallet, or committed
rape, abduction, or child abuses, inflicting bodily injury, etc.
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1.3.3: Law is Normative
It sets standards:
• In this case, it has four positions. These are:
• Prohibitive norms;
• Permissive norms;
• Directive norms; and
• Rewarding norms
1.3.4: Law is made by a Competent government Authority
• From among the three branches of government such as the legislative organ,
the executive organ and the judiciary organ: the legislative organ is
competent to make laws.
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1.4: Understanding the Function of Law

The major functions of law are mentioned as follows:
• Law maintains peace and order in the society. That is, to enforce
order that helps to protect the life, peace and property of the society;
• Law is a mechanism of dispute resolution and promote co-operations
and understanding among the society;
• Law limits the power of important government organs and there by
promote public and personal freedoms;
• Law determines the relationship of government with its citizens;
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• Law regulates and controls social behavior, this to mean it does not
focus on individual behavior;
• Law protects and respects fundamental human rights and freedoms
of individuals rights and promotes rule of law and social justice; and
• Law promotes economic growth and enables to plan and effectively
implement development activities that satisfy the needs of the
society etc.
• The FDRE Constitution of 1995 under its preamble addresses the
function of law underscoring as the goals of the constitution. The
objectives and functions are mentioned below:
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• To enable full and free exercise of the right to self-determination;
• To build a political community founded on the rule of law;
• To ensure peace;
• To build a democratic order;
• To advance economic and social development;
• To promote individual and peoples freedoms and rights;
• To promote equality;
• To promote unity with diversity;
• To enhance economic, social and cultural life of the peoples, etc.
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1.5: Understanding the Legal Systems
1.5.1: The Civil Law Legal System
• Written and Codified law;
• Not case law and has no precedence; and
• Judges may not made law through interpretation, etc.
Example: France, Italy, Germany, Ethiopia, etc.
1.5.2: The Common Law Legal System
• Unwritten and not codified;
• Case law and has precedence; and
• Judges can made law through interpretation, etc.
Example: UK, USA, Israel, and former colonies of the UK
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1.6: Source of Law
Definition: It is the origin from where the law emanates.
1: Customary Law;
2: Legislation;
3: Judicial Decision;
4: Legal Doctrine; and
5: Treaty.
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1.7: Classifying Laws
Why classification of law?
• Classification of law is important in order to make the law
manageable, coherent and consistent in its application.
• It is also necessary to classify law in order to make it easily
comprehendible by the lawyers, law enforcing institutions and the
societies; and
• hence, to make the law accessible to justice.
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1.7.1: Public Law and Private Law
1.7.1.1: Public Law
• It is a branch of law that regulates relations among state organs;
• legal relations in which a state as a public power is involved; and
• It also defines relationship of a state with its citizens.
• classified in to: National public law and public international law:
• Examples of national law: constitutional law, administrative law, public
finance law, criminal law, criminal procedure law, etc.
• Examples of Public international law: International Conventions, etc.
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1.7.1.2: Private Law
• It is a branch of law that regulates relations among individuals and
• Regulates relations of a state engaged itself in private business sectors like
in activities of commercial banks, transport, tourism, industry etc.
• classified in to Private National/domestic law and private international law.
• Examples of Private National law are: business law- law of contract, tort,
property law, law of business organizations, law of agency, etc.
• Examples of private international law are: Marriage between two different
citizens, etc.
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• Business law tries to meet the following common needs of business
communities:
• They demand that their agreement has to be respected;
• They require the decision of the court on commercial matters to be
predictable so that they would know what they should do;
• They have an interest that the law to be flexible enough to
accommodate business practice; and
• They need their disputes to be settled or resolved quickly without
rigorous procedures and with inexpensive manners because time itself
is money for business community
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1.7.2: Substantive Law and Procedural Law
1.7.2.1: Substantive Law
• It is a law that defines the rights, privileges and imposes duties of either
a state or an individual.
• It comprises all national and international public and private laws.
1.7.2.2: Procedural Law
• It is a law that used as a mechanism to decide disputes is procedural
law; and
• Procedural law comprises criminal procedure law and civil procedure
law.
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1.7.3: National Law and International Law
1.7.3.1: National Law
• It is also called domestic or municipal law.
• It is national law because it is made by one sovereign state
legislator;
• It is law because it regulates internal state and human behavior as
well as the character in which other laws may have; and
• Applicable with in the territory of a given country.
• The examples are: All national public and private laws
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1.7.3.2: International Law

• classifies in to public international law and private international law
1. public international law is a law which regulates relations between
two or more sovereign states.
• The Examples are: Conventions like UDHR,ICCPR, etc.
2. Private international law/Conflict of laws/ regulates relations of
individuals of different citizens.
• The Examples are: Marriage concluded between two different citizens,
business contract made between two different pe rsons residing in
different countries.
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• International law is created mainly by treaty and
international custom.
• It is international law because it is made by states;
• It applies throughout the world; and
• The subjects are states, international organizations such as
the UN, AU,EU, and Ambassadors, Diplomats, stateless
persons, etc.
• International law whether it is public or private, it has a
body of rules and principles that regulate the entire world.
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1.7.4: Criminal Law and Civil Law

1.7.4.1: Criminal law
• Criminal law is a branch of public law that deals with
criminal matters such as committing murder, rape, theft,
abduction, corruption, etc.
• Criminal law studies and identifies issues of criminal acts.
• Criminal law can be classified in to national criminal law,
criminal procedure law and international criminal law
and international criminal procedure law.
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• The purpose of criminal law is to maintain peace and order of the
society at national and international level.
1.7.4.2: Civil Law
• Crimes that are considered as international are terrorism, drug
trafficking, genocide, human trafficking, etc.
• Civil Law is a branch of national and international private law that
deals with civil matters such as when persons conclude contracts to
do different business transactions, concluding marriage, making a
will, donation, agreements made on buying and selling goods, etc.
• Civil law is also classified in to national and international depending
on its scope of application. 26
1.8: Hierarchy of Laws
• Hierarchy of laws is to mean the order of laws according to which
they obeyed.
Def: Hierarchy of laws can be defined as a coordinated arrangement of
laws among which a superior-subordinate relationship is expressed
as a direct relation of the power order in the law making authorities.
• Hierarchy of laws shows hierarchy of government organs.
• The superior government organ in law making power makes
superior/primary laws and lower government organ in law making
power makes lower/inferior or subordinate or secondary laws.
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• The legislative organ delegates the executive to enact subordinate
laws because of the following three reasons:
1. To reduce work load;
2. Due to the technical nature of the laws or technical competency; and
3. To obtain flexibility.
• constitution is superior to proclamation. Proclamation is superior to
regulation. Regulation/Decree is superior to directive. Directive is
superior to Notice.
• Test-1:15% + Final 5%
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Chapter-Two: Law of Contract in General
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Chapter-Two: Cont`d
2.1. Identifying Sources of Obligation
• Obligation is a bond of relationship (vinculum juries);
• it is a correlative of right in person-am;
• It is a bondage of rights and duties; and
• An obligation may be defined as corresponds to such right.
• Obligation can be emanated mainly from two sources. These are:
1. Law. Example tax levied on tax payer, paying compensation for damage
sustained; and
2. Contract. Example, a contact concluded between two parties. Rights and
duties are created as the result of the agreement of the parties.
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Chapter-two…cont`d
2.2. Defining Contract
• Definition “A contract is an agreement whereby two or more persons as between
themselves create, vary or extinguish obligations of a proprietary nature (Art.
1675 of the civil code of Ethiopia).”
• In this definition there are about six concepts that shall be explained:
1. A contract is an agreement. It is the meeting of mind or mutual understanding
of the contracting parties;
2. In any kind of contractual agreement there must have at least two persons or
parties who shall have distinct common intention;
3. Persons may be natural persons(human beings) or artificial or legal persons
created by operation of law (partnerships, companies, etc.).
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4. As between themselves : As explained earlier each contracting parties
must communicate and express their intention freely and such common
intention must be to affect their legal relations not any other;
5. The contracting parties have the freedom to create (form) or vary
(modify or change) or extinguish (remit or cancel) obligations by
themselves; and
6. A contract shall be measured in terms of money (proprietary nature).
From this definition, one can understand that a contract is an agreement
but not all agreements are contracts.
According to this definition is marriage a contract?
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2.3. Understanding Formation of Contract and its elements
• Definition: Formation of contract is about the legal requirements for
the existence of valid contractual obligations.
• Four essential/basic elements of contract shall fulfilled
A. Capacity of the parties to Enter in to a Contract
• Capacity is the ability/power a person to do any legally binding
juridical/civil acts.
• Requirements for capacity:
• The natural person shall attained the age of eighteen years;
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2. Natural persons who have normal mental status; and
3. A natural person who is not convicted and sentenced by the court put in to
jail/detained.
• Incapacity is the exception to the principle of capacity.
General incapacity
Requirements:
1. Minors: persons who are below 18 years of age;
2. Notoriously insane persons who are regarded as judicial interdicted persons; and
3. prisoners/detained persons by decision of courts who are regarded as legally
interdicted persons.
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Exceptions to the exceptions/Special incapacity:
• Persons who are feeble minded;
• Drunkards/habitually intoxicated;
• prodigals, like senile shall in appropriate cases be assimilated to insane
persons;
• Disability may result in incapacity in favor of the disabled persons when
others took advantages their disability; and
• Foreigners are also incapable in limited transactions like participating in
election, taking government positions, participating in insurance and
banking businesses, owning immovable properties, etc.
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• Incapable persons exercise their rights through legal representatives:
• Reasons:
• The legal assumption is that incapable persons cannot choose the right
course of action;
• The incapable persons may not understand the nature of their acts and
their legal effect; and
• If legal effect is given for the acts of such persons, they may be victimized,
that is, to protect their rights.
personality helps persons to enjoy their rights where as capacity helps
them to exercise their rights.
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B. Consent of the parties sustainable at law
Definition: Consent is an expression of intention or free will of persons
to enter into a legally binding agreement.
• Consent is expressed by offer and acceptance because parties reach
into an agreement through continuous exchange of offer and
acceptance.
• Offer is an expression of willingness to enter into a contract if
accepted by the other party.
• Acceptance is an unequivocal assent to the offer.
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• The person who offers to get acceptance or response from someone
to make a contract is an offeror.
• A person who is expected to give a response or express his
acceptance for such offer to conclude a contract is an Offeree.
• Offer or acceptance may be made orally or in writing or by signs
normally in use or by conduct such that in the circumstances of the
case there is no doubt as to the party’s agreement.
• In principle silence where an offer is made shall not amount to
acceptance.
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• But as an exception, an offer to continue or vary an existing contact
or to enter into a subsidiary or complementary contract may be
accepted by silence (pre-existing business relations).
• No acceptance shall be required where a party bound by law or by a
concession granted by the authorities to enter in to a contract on
terms stipulated in advance.
• This is a contract of adhesion which deserves silence amount
acceptance.
• Generally, acceptance must be positive, unconditional, unambiguous,
unequivocal and must not be changed, added to or qualify the terms.
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• Who can invalidate the contract?
• The person or party who affected by such act can invalidate the
contract.
• If she/he didn`t invalid the contract, it will continue, but it is defective.
• In this case a contract may be:
1. Void Contract
• It is to mean the contract is null or inexistent; called absolute nullity
• The object of the contact is illegal or immoral or impossible.
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2. Voidable Contract
• Voidable Contract is to mean annullable contract.
• The object of the contract is not illegal; immoral or null but has a defect. It is
called relative nullity.
3. Unenforceable Contract
• Unenforceable Contract is a contract which cannot be enforced.
• It is a matter of evidence.
• A contract that cannot be proved by evidence, or that cannot be proved by
any means is unenforceable contract.
• It may not have any defects in its formation.
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• Consent is considered as defective or vice when there is:
1. Fraud made by either of the parties against the other
A. Essential fraud
• It is when the fraud or deceived person assured that, had s/he known the
truth s/he would not have entered in to a contract.
B. Incidental fraud
• It is incurring burdensome obligation. It cannot be a ground for invalidation
of a contract.
• A contract may be invalidated on the ground of fraud where a party resorts
to deceitful practice
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• Concerning fraud the relationship of the parties shall observed, such
as ordinary or special relationship.
• Ordinary relationship is that when the parties did not know each
other they simply made an ordinary business transaction
• In a special relationship, it requires confidence between the parties
because they know each other.
• Thus, the law is strict here that any simple or slight fraud resulted in
invalidation of the contract.
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2. Duress or Coercion/Forceful act- may be either physical or
psychological influence against the contracting party or his family.
• How do we know whether there is duress or not? There are two
standards:
1. Absolute standard
2. A relative standard
• Threat to exercise a right is not considered as duress.
• In principle reverential fear may not be a ground or a cause for
invalidating a contract.
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• Unconscionable Contract-is a contract made between two parties
having more benefits to one of them.
3. Mistake- to invalidate a contract it shall be:
• Decisive-it is subjective criteria relates to the understanding of the act
like when the mistaken party proves “Had I known the reality or the
truth, I would not have entered into the contract”; or
• Fundamental-it is objective criteria relates to good faith and non-
observance of the elements of contract.
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C. Object of the Contract
• Object normally refers to the obligations of the contracting parties.
• The object of the contract shall be:
• clearly and sufficiently defined;
• Possible;
• Lawful; or
• moral.
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D. Form of the Contract
• No special form shall be required unless it is stipulated by the parties
or prescribed by law.
• Parties can make their contract in writing, orally or by conduct
depending on the nature of their contract unless it requires a written
form mandatorily.
• Contracts relating to immovable property, loan contract on 500 or
more birr, insurance contracts, and contracts of guarantee,
administrative contracts, contracts of employment and others similar
to such contracts shall be made in writing.
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3.4. Effect of Contracts
1. Interpretation of Contracts
2. Performance of Contract
• What constitutes performance?
• The terms and conditions of the contract constitute the respective
responsibility of the parties.
• Performance of a contract must be exact and precise
• What if the goods deviated from the agreed quality, quantity and time?
• The creditor may refuse partial performance where the debt is liquidated and
fully due or matured
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3. Variation of Contract
• many legal systems prohibit courts to vary, change or alter or modify
the terms of the contract and our law of contract too except in such
cases as are expressly provided by law.
• Only the parties vary or alter the terms of the contract in agreement
when there is a variation on certain condition that affects the contract.
4. Non–Performance of a Contract and its Effects
• It is when the contracting parties perform improperly, defective, or
delayed with regard to the terms of the contract.
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• Effects of non-performance:
a) Forced performance
b) Cancellation of a contract
c) Compensation for damage
• Is there a possibility for the other party to escape liability on the basis
of no fault as a defense?
• The answer would be no, regardless of where the person is at fault or
not s/he shall pay compensation
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• Before taking the remedies for non-performance of the contract; the
other party should give default notice, which is the pre-requisite for
taking remedies.
• Notice helps the creditor to put in to default the debtor;
• To inform the debtor whether he is ready to perform or not;
• Notice is a warning to the other party that has not performed his duties;
• Notice can be made in writing or orally; and
• Notice may not be given unless the due date of the contract is matured,
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• In exceptional cases, no need of giving notice when:
• The obligation is to refrain from certain acts;
• 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;
• The debtor have declared in writing that he would not perform his
obligations;
• they are agreed in the contract that notice shall not be required and
the debtor shall be in default up on the expiry of the fixed date;
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3.5. Extinction of Obligations
• Extinction of Obligation is to mean the non-existence of obligation of
the parties. An obligation shall cease to exist
• Causes for Extinction:
1. Cancellation of a contract;
2. Invalidation of a contract;
3. Performance of the a contract;
4. Termination;
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5. Remission of debts made by the creditor
6. Novation of obligation;
7. When the contract is set-off;
8. Merger of obligation; and
9. Statute or period of limitation.
Test-2: 20% + Final: 10%
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Chapter-Three
The Law of Business and Business

Organizations
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Chapter-three…cont`d
3.1: Defining Businesses and Identifying Traders
• Article 124 of the commercial code defines “ as an incorporeal
movable consisting of all movable property brought together and
organized for the purpose of carrying out any of the commercial
activities specified in Article 5 of the commercial code.”
• Property is classified in to immovable and movable.
• Movable property is classified in to corporeal(tangible) and
incorporeal (intangible) movable properties.
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• Since Article 124 cross-refer to article 5 to have a better understanding of
the concept of a business, it would be better to look at Article 5 of the
commercial code which defines persons to be regarded as traders’ “persons
who professionally and for gain carry on any of the following activities shall
be deemed to be traders.”
1. Purchase of movables or immovable with a view to re-selling them either
as they are of after alteration or adaptation;
2. Purchase of movables with a view to letting them for hire;
3. Warehousing activities;
4. Exploitation of mines, including prospecting for and working of mineral oils;
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5. Exploitation of quarries not by handicraftsmen;
6. Exploitation of salt pans;
7. Conversion and adaptation of chattels, such as food staffs, raw
materials or semi-finished products not by handicraftsmen;
8. Building, repairing, maintaining, cleaning, painting or dyeing
movables not by handicraftsmen;
9. Embanking, leveling, trenching or draining carried out for a third
party not by handicraftsmen;
10. Carriage of goods or persons not by handicraftsmen;
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11. Printing and engraving and works connected with photography
cinema to grapy not by handicrafts men;
12. Capturing, distributing and supplying water;
13. Producing, distributing and supplying electricity, gas, compressed
air including heating and cooling;
14. Operating places of entertainment or radio or television stations;
15. Operating hotels, restaurants, bars, cafes, inns, hairdressing
establishments not Operated by handicrafts men and public bath;
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16. Publishing in whatever form, and in particular by means printing,
engraving, photography or recording;
17. Operating news and information services;
18. Operating travel and publicity agencies;
19. Operating business as an agent, broker, stock broker or commercial agent;
20. Operating a banking and money changing business; and
21. Operating an insurance business.
• But, Article 5 does not define business as it requires but defines what is
trading and who is a trader.
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3.2. Identifying the Elements of Business (Arts127-149)
• The basic elements of business are:
• Goodwill;
• trade-names;
• distinguishing marks; example-trade mark
• right to the lease of the premises; and
• patents and literary or artistic copyrights.
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• Why elements of business are necessary?
• Reasons:
• In order not to confuse consumers;
• In order to be identified similar businesses each other; and
• In order to protect the rights of the business from unfair trade practice.
3.3. Understanding Forms of Business/trade
A. Sole Proprietorship
• there’s an individuality of ownership;
• Does not require formality except having license.
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• The owner is liable for any loss or debt of the business; and
• To begin this business no need of contractual agreement.
B. Business Organization
• two or more people with same interest put together their resources
and forms a single unit.
• It requires serious formalities to fulfill such as:
• contractual agreement, capital etc., which regulated by the
commercial code of Ethiopia.
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3.4. Defining Business Organization
• Article 210 of the commercial code defines a business organization as
“any association arising out of a partnership agreement.”
• partnership agreement is defined by Article 211 of the commercial
code as “a contract whereby two or more persons who intend to join
together and to cooperate undertake to bring together contributions
for the purpose of carrying out activities of an economic nature and of
participating in the profits and losses arising out thereof, if any”.
• Thus, a partnership agreement has four features:
1. It’s a contract;
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2. It has a business purpose;
3. Parties must bring contributions. Contribution can be in cash, debts,
skill (service), property (title of property or use of property );
4. There must be cooperation amongst the parties.
3.5. Acquisition of Legal Personality of Legal (artificial) Persons
Requirements:
• Documents for establishment such as memorandum of association
and articles of association;
• Registration in the respective commercial registery; and
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• Publicity in an appropriate news paper.
• However, why do entities want to acquire legal personality?
• The reason is that legal personality has the following attributes:
1. A legal person may sue or be sued in its own name;
2. A legal person can own & administer its own property;
3. A legal person can conclude a contract;
4. A legal person to perform its obligation such as to pay taxes; and
5. A legal person can have a residence.
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3.6. Distinguishing Forms of Business Organizations in Ethiopia
A. Commercial and Non- commercial
• Commercial-If a business organization engaged in one of the activities
provided under Article 5 of the commercial code
• Non- commercial-if a business organization engages in one of the
activities not listed in Article 5 of the commercial code
B. Partnership and Companies
• Business organizations can also be classified as partnership and
companies. They have differences in capital and liabilities and others.
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Six forms of business organization:
1. Ordinary partnership;
2. Joint venture;
3. General partnership;
4. Limited partnership;
5. Private limited company; and
6. Share company.
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1. Ordinary Partnership
• It is a non-commercial business organization;
• It does not have the characteristics of each of the five other business
organizations;
• If it does engage in activities provided under Article 5 it deems to be a
general partnership;
• It doesn`t have trade name;
• It has two minimum partners;
• Partners have unlimited liabilities;
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• Every partner must make a contribution. The contribution may be:
• Money/in cash;
• Debts;
• In kind, that is, property or use of property; and
• skill.
• Unless otherwise agreed by the partners, contributions must be equal
& of the nature & extent required for carrying out the purposes of the
partnership.
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• The affairs of an ordinary partnership can be divided into two:
Special Acts: acts which go beyond normal partnership practice and the
consent of every partner’s required.
Acts of Management: acts which are in line with normal partnership
practice, these are determined on firm by firm basis.
• Managers in an ordinary partnership may be appointed in three ways:
The first way is by appointment in the partnership agreement and that
person is called a statutory manager;
The second way is appointment by partners in subsequent decisions; and
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The third way is, in the absence of the two ways, every partner may
become a manager; this is appointment by virtue of the law.
• a partner shall have the right to check the estate of the firm’s or
partnership’s business;
• A partner cannot introduce a third party as a partner without the
consent of the other partners;
• Partners shall share all profits which are partnership profits and every
partner may require that profits be distributed immediately after the
approval of the management report;
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• Partners shall have an equal share in profits and losses irrespective of
their contribution unless there is another agreement;
• Partners may make an agreement to the effect that a partner who
contributes skill only shall share in the profits and not in the losses;
• The decision of a court or the partners to dissolve the partnership will
bring to an end the partnership engaging in new business.
• Examples of Ordinary partnership: handicrafts, forestry, fishery, etc.
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2. General Partnership
• It can engage in commercial and non-commercial business;
• It has two minimum partners;
• It consists of partners, who are personally, jointly, severally and fully liable as
between themselves and to the partnership for the partnership firm’s
undertakings, that is, partners have unlimited liability to the partnership;
• It must have a firm – name which shall consist of the names of at least two of the
partners followed by the word, ‘General partnership” and should not contain
names of persons who are not partners;
• If a person who is not a partner permits his name to be used in the firm-name,
he will be liable as a full partner.
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• The partners shall draw up the memorandum of association. It shall
contain:
• The name, address and nationality of each partner;
• The firm – name;
• The head office and branches, if any;
• The business purpose of the firm;
• The contributions of each partner, their value and the method of
valuation;
• The services requires from persons contributing skill;
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• The share of each partner in the profits and in the losses as the
agreed procedure for allocation;
• The managers and agents of the firm; and
• The period of time for which the partnership has been established.
• The partnership published as per the law shall contain the
memorandum of association;
• This should also be the same on the application for registration in the
commercial register and the application must also be signed by the
manager or a person acting on his behalf;
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• In a general partnership a manager appointed in the memorandum of association
or following an amendment of the memorandum may only be dismissed by court
of law for good cause; and
• If it is a manager who is not appointed under the memorandum of association,
then he/she may be freely dismissed by the partners.
3. Limited Partnership
• It engages in commercial and non-commercial activities;
• It has two minimum partners and has no minimum capital;
• A limited partnership comprises of two types of partners:
• general partners who are fully liable personally, jointly and severally; and
• limited partners who are only liable to the extent of their contribution.
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• The partnership must have a firm name which must consist of the names of
the general partners with the words “Limited partnership”;
• If a limited partner allows his name to be included in the firm name, then he
will be liable to third parties in good faith as though he were a general
partner;
• The memorandum of association of a limited partnership shall contain all the
particulars mentioned in general partnership;
• In addition shall contain information as to who are general partners or limited
partners;
• Registration in the commercial register shall be made and the application
must be signed by the manager or person acting on his behalf.
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4. Joint Venture:
• A joint venture is an agreement between partners on terms mutually
agreed and is subject to the general principles of law relating to
partnership;
• Unlike other business organizations, a joint venture is not made
known to third parties;
• the agreement need not be in writing; and
• and is not subject to registration and other forms of publication; and
• as a result a joint venture does not have legal personality.
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• When a joint venture is made known to third parties, it shall be deemed in so far
as such parties are concerned, to be an actual partnership.
• In a joint venture there may be:
1. A Sleeping Partner
• unknown or undisclosed to third party; and
2. Managing Partner
• the venture gives the managing partner the front of pretending he/she does not
need the contribution of others;
• and may pretend he/she owns the business;
• Moreover, he/she becomes the manager transact in the name of the partnership.
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5. Private Limited Company
• it is a company whose members are liable to the extent of their
contributions;
• A private limited company cannot have less than 2 or more than 50
members;
• It required a minimum amount of capital of 15,000birr;
• The amount of a share shall not be less than 10birr;
• All shares shall be of equal value;
• A member may hold more than one share.
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• It cannot undertake banking, insurance, or any business of a similar
nature;
• It does not issue transferable securities shares, bonds, cheques, etc.
• It may have a firm-name which followed by the words “private limited
company;
• It has similar memorandum of association and articles of association to
that of a share company;
• It need not convene any meeting of shareholders if it has less than 20
members;
• A private limited company does not require having auditors;
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• It is not required to be managed by a board of directors;
• it can be managed by managers who can be shareholders or outsiders
appointed by decision of shareholders or by the Article of association;
• In this case, the word share does not give the same meaning to that
of share in a share company;
• It is because in a private limited company the amount of contribution
collected from members is contribution in percent;
• In a private limited company, contribution is in the form of skill, debt,
property or in cash;
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• In a private limited company shares are not easily transferable
(registered shares) unless the members consented to issue a
transferable share (contribution).
6. Share Company
• It is a company whose capital is fixed in advance and divided into
shares and one fourth of it shall be paid up of capital;
• Shareholders` liabilities are met only by the assets of the company;
• The name of a share company shall be as agreed but it should not
offend public policy, or the rights of third parties and it must include
the words “share company;”
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• The minimum amount of capital is 50,000birr;
• Currently, the amount of money provided here is not applicable for banks
and insurance in Ethiopia;
• The amount of the par value of each share cannot be less than 10birr;
• A share company cannot be established by less than five members;
• The format of a share company shall be public memorandum and it shall
contain:
• The names, nationality and address of the members, the number of
shares which they have subscribed, provide that a member may not
subscribe less than one share;
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• The name of the company;
• The head office, and the branches, if any;
• The business purpose of the company;
• The amount of capital subscribed and paid;
• The par value, number, form and classes of shares;
• The value of contributions in kind, their object, the price at which
they are accepted, the designation of the shareholder and the
number of share allocated to him by way of exchanges;
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• The manner of distributing profits;
• Any share in the profits allocated to the founders and reasons for such
share;
• The number of directors and their powers and the agents of the
company;
• The auditors;
• The period of time for which the company is to be established; and
• The manner in which the company will publish its reports.
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• The articles of association which govern the operation of the
company must be drawn up by the founders in accordance with the
law;
• Publicity requirements put down by the commercial code should be
fulfilled; and
• When the requirements as to publicity and registration have been
met, a company shall have legal existence and legal personality even if
all the legal requirements relating to the formation of a company have
not been complied with.
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A share company has four managements. These are:
1. General Meetings of Share Holders;
2. Board of Directors (3-12 members);
3. Auditors; and
4. General Manager/ Chief Executive Officer (CEO).
• A share company can issue transferable securities such as shares,
bonds, cheques, bills of exchange, warehouse certificate, promissory
notes.
• as a result it runs bank and insurance businesses.
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3.7. Dissolving Business Organizations
• Business organizations may not exist for ever.
• The reasons that causes to extinguish business organizations may be
classified in to three.
• Business organization may be dissolved by agreement of the persons
who formed them;
• Business organizations may also be dissolved by court order; or
• In certain defined cases, the business organization may be dissolved
by operation of law. .
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• Before dissolution there is winding-up/liquidation process made by
liquidator(s);
• Liquidator(s) may be appointed by the owners agreement or by the
court;
• In accordance to the Liquidator(s)report assets of the business
organization paid/ distributed to creditors, employees and owners;
• Finally the court declared bankruptcy and dissolved it.
Assignment: 15% plus Final: 5%
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Chapter-Four: The Law of Sales
4.1. The Law of Sales Contract
• It is a little bit complicated sales contract has a connection with law of
property and law of general contract;
• It holds up acquisition of ownership and transfer of ownership;
• Sale is an exchange of goods for money where as bartering is an exchange of
goods for goods; and
• a contract of sale is a contract expressed in money.
4.2: Forming Sales Contract
• the basic requirements of general contract such as consent, capacity and
object shall be fulfilled but not form;
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Chapter-four…cont`d
• Form is not a requirement because a contract of sale only governs a
corporeal (tangible) moveable goods business transaction in good
faith; and
• To form sales contract, one has to determine the scope of sales
contract and its definition.
4.3: Scope of sales contract
• A contract of sale only governs a corporeal moveable goods in good
faith such as households, clothes, shoes, etc.
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• It does not include immoveable properties, incorporeal moveable
goods, special moveable goods and stolen and lost corporeal
moveable goods.
• The civil code of Ethiopia Art.2266 defines a contract of sale as “a
contract of sale is a contract where by one of the parties, the seller,
undertakes to deliver a thing and transfer its ownership to another
party, the buyer, in consideration of a price expressed in money which
the buyer undertakes to pay him.”
• This definition shows as the existence of the seller and the buyer;
• The capacity and consent of the parties and object of the contract;
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• Delivery of the goods sold;
• The existence of the goods sold; and
• Price determination.
In sales contract acquisition of ownership is possible through:
• Occupation;
• acquisition in good faith; and
• accession.
• Transfer of ownership and delivery of the goods sold are very important
in sales contract because risk transfers at this time.
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4.4: Understanding Performance of Sales Contract
• Performing a contract of sale is a combination of the obligations of
the seller and the buyer.
A. Obligation of the seller:
• delivery of the thing sold;
• transferring ownership of the goods sold;
• warranty against dispossession of the thing sold; and
• Warranty against defects and non-conformity.
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 Modes of delivery:
• Actual delivery; or
• Constructive delivery; and
• Symbolic delivery.
B. The obligation of the buyer:
• obligation to pay price and to take delivery;
• to call the seller or his/her agent during inspection; and
• to notify the dispossession by third party made, defects or non-
conformities found to the seller.
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C. The common obligations of the seller and the buyer are:
• preservation of the thing sold;
• to cover expenses; and
• To cover customs duties.
• Performance, non-performance of sales contract and its effects are
the same to that of the principles provided under general contract.
Final: 5%
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Chapter-Five: Agency Contract
5.1. Agency Defined
• Agency is a contract where by a person, the agent, agrees with another
person, the principal, to represent him and to perform on his behalf one or
several legally binding acts (Art. 2199, of the civil code).
Requirements of agency contract:
• Consent of the principal and the agent;
• Object of agency contract;
• Capacity of the principal not of the agent; and
• Form is not a requirement because parties can make expressly or impliedly.
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Chapter-five…cont`d
5.2. Sources of power of Agency
1. Law
Examples:
• Guardians for incapable persons;
• bodies corporate (Legal person);
• Households or spouses;
• unauthorized agency (agency of necessity); and
• curator ship or representation by court authorization.
2. Contract: Express or implied agreement of the parties.
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5.3. Scope of Agency
• Agency may be created to perform almost any act which the principal
can lawfully do.
A. The object of the contract of agency must not be crime nor is
contrary to public policy.
B. Some acts must be performed in person and can’t be entrusted or
delegated to an agent:
• Concluding marriage;
• voting right;
• testifying in a court;
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• making a will are instances where personal action is required.
Forms/Types of agency are:
A. General agency (Art.2202/3 of c.c )-is agency contract expressed in
general terms to perform act of management.
• Acts done for the preservation or maintenance of property;
• lease for not exceeding three years;
• the collection of debts;
• the investment of income;
• and the discharge of debts;
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• The sale of crops;
• Goods intended to be sold or perishable commodities shall be deemed to be
acts of management.
B. Special agency (Art.2204/5)-is said to be complete agency. Agency contract
which requires specific authority.
• alienate or mortgage real estate;
• invest a capital;
• sign bills of exchange;
• effect a settlement;
• consent to arbitration;
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• make donations; or
• bring or defend an action.
5.4. Distinguishing the Duties of the Agent and the principal
A. Duties of the Agent
• Shall act with the strictest good faith towards his principal interest;
• shall disclose to the principal any circumstance which would justify the
revocation or variation of agency contract;
• the duty to loyalty;
• to perform the work which he has been appointed to do;
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• to follow instructions of a principal or custom or nature of the
transactions;
• to take reasonable care and skill;
• to avoid conflict of interest;
• to remit sums received by him and all profits accruing to him in the
courses of his employment;
• to maintain accounts and reports;
• not to delegate another agent; cannot further delegate the work or
substitute, which has been delegated to him by his principal unless
authorized by the principal to delegate or substitute another agent
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B. Duties of the Principal
• to remunerate the agent;
• to indemnify an agent against any loss; and
• to release the agent’s liabilities which he incurred in the interest of
the principal
C. Liabilities of the agent and the principal
• The principal is liable for the act done by the agent with in his power.
• The agent is liable for the acts done beyond his power unless ratified
by the principal.
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5.5. Termination of Agency
Grounds for termination of agency are:
• When revocation or repudiation made by the principal;
• When renunciation made by the agent;
• Death of either parties or declared absence of either parties;
• Incapacity/unabilityof an agent or a principal;
• bankruptcy of an agent or a principal;
• when there is lapse of time of the agency;
• when the purpose of agency is achieved;
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• when there is occurrence of a specified event;
• by mutual agreement of parties or unilateral termination of either
party;
• when agency relationship has impossibility;
• when agency relationship has Illegality; and
• when the subject matter of the agency has changed its circumstances.
Final: 10%

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Chapter-6: The Law of Security Devices
Final: 5%
6.1. Defining security devices
• They are instruments which serve as guarantees for credit operations;
• These are devices or instruments that assured creditor from risks of
non-payments or insolvency;
• Credit transactions or contracts where by creditors give service of loan
of money, sale of goods, etc. and debtor promises to pay at some
future date;
• By having security devices two things are secured, that is, the creditor’s
fear of non-payment is minimized and the debtor as well obtains the
services;
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Chapter-six…cont`d
• Thus, security devices enhance in financing trade.
6.2. Classifying security devices
• security devices are categorized in to two: These are:
Personal guarantee or surtyship; and
Real security devices.
A. Surety ship or personal security devices
• Surety ship is to mean the personal security device or contract of
personal guarantee.
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• Its purpose is to guarantee or to avoid risk of non-payment or non-
performance.
• The two contracting parties in surety contract are the surety
(guarantor) and the creditor.
• Surety is the person guarantying principal debtor’s obligation.
• The person assuring payment is the surety.
• Thus, surety contract is the result of a relationship of three persons.
• These are the creditor, the debtor and surety (guarantor).
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• Surety ship is a contract between a person called surety and another
person called creditor to pay the debt or discharge an obligation
should the debtor failed;
• The surety may agree to guarantee an obligation, even without
request and awareness of the principal debtor;
• Surety contract has special features, such as, it is a unilateral contract,
an accessory contract, and the main obligation should be patrimonial
nature, that means, it is measured in terms of money;
• surety contract shall be entered in writing; The requirement of writing
itself indicates that the contact of surety cannot be implied;
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• the surety contract shall be signed by the surety and the creditor;
• It shall also be attested by witnesses;
• Surety’s maximum amount of obligation shall be clearly indicated in the
contract; and
• A guarantee may not exceed the amount owed by the debtor nor be
contracted on more burdensome.
• The relationship between the creditor and the surety can be created in to
two ways. These are:
A. Simple guarantee; and
B. Joint guarantee.
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1. Simple guarantee
• The debtor provides a person as a guarantor for his debt to the
creditor;
• In a simple guarantee the creditor claim or demand payment or
performance first to the principal debtor not the guarantor;
• A simple guarantor or surety can avail defenses, such as benefit of
discussion as a defense and any defense available to the main debtor;
• That means, the surety or guarantor can say to the creditor ask the
debtor first and if he failed to discharge his obligation come to me.
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2. Joint guarantee
• In joint guarantors, the creditor can claim or sue the guarantor
without previously demanding payment from the debtor or realizing
his securities;
• Joint guarantors are consider as one the debtors of the creditor;
• They joint and several liability to the debt of the debtor;
• Joint guarantors can`t raise benefit of discussions as a defense; and
• Joint guarantors are counter guarantors.
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B. Real security devices
This is when the debtor delivers property in the form of:
• pledge; or
• Mortgage; or Antichresis.
Real security is the safest position of security devices because there
will not be a danger of non-payment.
The most identifiable real security devices are:
• pledge; and
• mortgage.
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1. Nature and definition of pledge
• Pledge is a real security given by a debtor or third party called pledgor to
the creditor (the pledgee) in the form of a corporeal movable chattel in
good faith as a security for the performance of principal obligation that is,
established between the debtor and the creditor.
• The agreement concluded between the pledgor and pledge is called the
contract of pledge;
• The person securing an obligation is a pledgor;
• The creditor to whom guarantee of a moveable good given is a pledgee;
• The thing pledged is a pledge.
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• A moveable property given for the security will be possessed by the
creditor until the obligation is discharged;
• If the obligation is discharged pursuant to the terms of the contract the
thing (the pledge) will be given back to the pledgor;
• The thing to be pledged shall be capable of being sold separately by
public auction;
• Accessories and intrinsic elements of an immovable properties, if it
could be separated from the immovable may be pledged (Art 2829 (2)
of the civil code);
• incorporeal things (claiming and intangible) can be pledged;
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• Pledge is an accessory contract like surety ship.
What does accessory contract mean?
• Accessory contract are contracts that do not exist by themselves;
• In the absence of a valid principal contract, pledge may not be
extinguished and the pledge shall be returned where the debt
guaranteed is discharged (Art 2849 civil code);
• This is to mean for validity and enforceability of an accessory contract,
existence and enforceability of primary contract is mandatory.
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Requirements to have a valid pledge contract are:
• Capacity of the parties to enter in to a contract;
• Consent of the parties sustainable at law;
• Object of the contract; and
• Form (written form is required if the amount pledged is more than
500birr).
Duties of the pledgor
• The thing pledged will be preserved at the cost of the pledgor not at
the cost of the pledgee.
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• the pledgor shall reimburse the pledgee the expenses incurred in
maintaining and preserving the pledge.
Rights of the pledgee
• The pledgee has the right to retain the thing pledged until the debt is
paid;
• Until the whole debt is discharged the whole pledge may be attached
by the pledgee;
• The other right that the pledgee has is that, he is conferred with real
right;
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• The rights included here are right of pursuit and right of preference
(priority right).
 Duties of the pledgee
• Restitution-if the whole debts including incidental costs and expenses
discharged, the pledgee shall return the thing pledged to the pledgor; and
• Preservation of the thing pledged are duties of the pledgee.
Forms of execution
• When the pledgor does not discharge the obligation, the pledge contract
may be executed in different ways:
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• The general principle of execution of pledge is the thing pledged will
be sold by public auction;
• The court may also order the thing to be sold privately; and
• The bank is authorized to sale the thing without the need of judicial
assistance (exception).
2. Nature and definition of mortgage
• Mortgage creates two real rights such as right of preference and right
to pursuit;
• There is no right of possession in good faith in mortgage;
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• the status of immovable property are confirmed by registration and
publicized to third party;
• The debtor has the right to possess the object mortgaged but to
deliver the documents which show the title deed;
• The things that mortgaged are all the immovable and exceptionally
some special movables can be mortgaged;
• Exceptionally some movable properties like ship (Art. 33-40 maritime
code), Airplane, a business (Art. 171-185 commercial code) may be
mortgaged.
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Mortgage can be made in three ways:
1. Conventional- is created by agreement of parties;
2. Legal-is created by the operation of law, example succession; and
3. Judicial-is when a debtor condemned by court or any other tribunal
The requirements for the validity of mortgage contract
• It shall be made in writing (written form);
• Consent and capacity of the mortgagor and the mortgagee;
• The property mortgaged shall be specified (object of the contract);
• The person who may mortgage a property is also required.
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Chapter-Seven: Law of Insurance
Final:10% on condition
7.1: Defining Insurance
Insurance can be defined in different ways:
• Insurance is generally understood as an arrangement for transferring
and distributing of risk (functional point of view);
• Insurance is defined as a transfer of risk (insured`s point of view);
• Insurance is defined as a distribution of risk(society`s point of view);
• Insurance is a business (insurer`s point of view); and
• Insurance is defined as a contract (Legal point of view).
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Chapter-seven…cont`d
7.2: Function of Insurance
• Insurance provides financial security to individuals;
• Insurance provides assistance to business enterprises;
• Insurance provides financial stability to commerce, industry and the
community; and
• It serves as a basis for credit that means, it serves as a collateral
security.
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7.3: Formation of Insurance Contract
Requirements
• Capacity of the parties to enter in to insurance contract;
• Consent of the insured and the insurer sustainable at law;
• Object of the insurance contract must be sufficiently and clearly
defined, possible, lawful and moral; and
• Form is also a mandatory requirement that shall be in a written form
and must be attested by two witnesses and shall be registered.
128
There is a proposal prepared by the insured:
• Proposal form may be prepared by the insured and when the insurer
accepts the insurance contract exists;
• Sometimes the proposal form may be prepared by the insurer;
• The issue of form that expressed in Article 1725, 1727 and 1720 must
be materialized;
• However, in practice the insured wrote a proposal form and submitted
to the insurer and based on this, the insurer issued an insurance policy.
The insurer signed on the policy issued, then, becomes a contract of
insurance.
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7.4: Classification of insurance
Insurance can be classified in to many different parts by taking in to
account different factors:
A/ by taking its duration or life span of insurance
• Long term insurance-Example, life insurance, annuity insurance, etc.;
and
• General insurance-Example, motor insurance.
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B/ Insurance can be classified in to three by taking in to account the

nature of risk.
• Marine insurance;
• Causality insurance-Example, Burglary insurance; and
• Life insurance.
The need for this classification is for the purpose of specialization.
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C/ Insurance can be classified also in to two by considering the nature
of the insurance cover provided.
1. Indemnity insurance
• Insurance of objects; and
• Liability insurance.
2. Non-indemnity insurance
• Insurance of persons
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7.5: The rights and obligations of the insured and the insurer
• The main or basic obligation of the insured is to pay premium; and
• The insured has also an obligation to disclose the material facts when
entered in to the insurance contract and even after a certain damage
or loss materialized.
• The basic obligation of the insurer is to pay sum of money when the
specified accident or risk is materialized.
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7.5.1: Fundamental Principles of Insurance
There are seven principles of insurance to identify the rights and
duties of the insurer and insured as discussed below:
A. The principle of attachment of risk
• Property and human beings are continuously exposed to risk, that is,
there is always uncertainty of life, property or economic loss; and
• Understanding of this, human beings have taken care of to secure
such risk.
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Risk is divided in to pure and speculative risk.
• Pure risks are risks that bring physical disappearance. For example,
risk of flood, fire, etc.; and
• Speculative risks are risks of loss of property because of function of
market, change of fashion or taste.
There are some basic techniques of risk management hereunder:
• Avoidance of the risk;
• Risk prevention or reduction;
• Risk retention/self-insuring; and
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• Risk transfer mechanism/insurance.
B. The principle of insurable interest
• The insured must have a particular relationship with the subject
matter of insurance (object of Insurance contract).
C. The principle of utmost good faith
• Utmost good faith (uberrima fides) is defined as a positive duty to
voluntarily disclose, accurately, and fully all the materials facts to the
risk being proposed, whether asked for them or not.
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• The utmost good faith duty rests highly on the insured party not on
the insurer;
• because it is the insured that is going to be insured a certain items or
materials and when a risk happened the insured has to reveal the risk
materialized in good faith;
• Not disclosing the material facts resulted in concealment or fraud;
• However, this does not mean that the insurer has no duty; insurer has
to put safety or designed a risk protective or preventive mechanism.
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D. The principle of indemnity
• Indemnity is to mean the exact financial compensation sufficient to
place the insured damaged in the same financial position after a loss
sustained;
• At the event of any claim the payment made to the insured can’t
exceed the extent of his interest on the subject matter of the
insurance.
• Compensation= Loss sustained (principle);
• Compensation > or< Loss sustained (for non-indemnity insurance).
138
The reasons why life and personal accident are not categorized under
indemnity insurance are because :
• they are unable to measure their insurable interest; and
• they are unable to bring in to their previous position (re-instatement).
Assessment for indemnity insurance should be made as:
• In the insurance of objects, the value of the property before the loss
should be measured (valued); and
• In the liability insurance, the amount of compensation for damage is
determined by the court award or negotiated award or arbitration
award.
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Indemnity may be made or provided through:
• cash;
• replacement (in case of glass insurance);
• Re-instatement or repair (in case of buildings and motor insurance);
• when there is partial loss.
The insured may not cover a full amount when:
• The insured may agree in to the insurance policy or contract ;
• The loss may be very less amount of money; and
• the insured knows a risk is materialized.
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How do we see the prior agreement of the parties?
• The insured may agree in to the insurance policy or contract to be
indemnified in the form of replacement rather than to be paid in cash
• It is possible to determine the form of indemnity prior in their
agreement;
For example:
(1)replacement is usually for glass insurance;
(2)re-instatement is for buildings; and
(3)repair is mostly for motor insurance.
• In the mode of indemnity, the option is mostly given to the insurer.
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• Indemnity is an exact financial compensation that commensurate to
receive a full amount of the loss by the insurer
There is limited indemnity:
• The maximum amount that recoverable under insurance is limited by
the sum-insured, that is, the insured cannot claim a greater amount
than the sum insured (determined by the contract).
• According to proclamation No.559/2008 the amount of compensation
for third party liability for a person died is up to 40,000birr and
injured person is up to 15,000birr (determined by law).
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• Under insurance is when the sum-insured does not represent the full
at risk.
• The actual value is 80,000birr but the value insured is 50,000birr
• Partial loss with the sum-insured is 20,000birr
We apply the following formulae.
• Sum insured X Loss=50,000birr X20, 000birr =12,500birr
Full value 80,000birr
• Then the insurer will be liable proportional or average to this, that is,
12,500birr.
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Another reason that the insured may not cover a full amount is when:
• there is an excess clause in the policy, usually made by agreement for
two reasons.
(1)The loss may be very less amount of money; and
(2)When the insured knows a risk is materialized.
For such reasons the insured may not get full amount during loss.
• For example, the loss may be 10,000birr and the excess clause in their
policy may be 500birr; and
• the insured will only cover 9,500birr.
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E) The principle of subrogation
• Subrogation is considered as the natural consequence or corollaries of
indemnity.
• subrogation is the right of one person, having indemnified another under a
legal obligation to do so.
• It is to stand in the place of the other person and avoid himself of all the
rights and remedies of that other person whether already enforced or not.
• Subrogation is sometimes known as substitution.
145
• If the insured has no present or provide the document to the insurer, the
insurer may relieve in whole or in part of his liabilities to the beneficiary.
• If the third party is the ascendant, descendant or an employee of the
insured, the right of subrogation is not given to the insurer unless the
persons acted maliciously.
• The reason is, it is against the public interest and public policy of the
society.
• If the parties clearly stipulated to be subrogated in their contract, the
insurer will have the right to substitute the insured and be subrogated
from any other on behalf of the insured (Article 2093 civil code)
146
• But in the commercial code Art. 683(1) whether there is agreement or not the
insurer is entitled to substitute the insured to bring action against third party;
• Insurance of persons (life) is not indemnity insurance but insurance of
benefit.
• Insurance of persons shall not be subrogated or substituted even if provide in
the policy;
• The person may get from different benefits as the result a person is not
allowed for subrogation;
• However, under insurance of object (property) subrogation is possible; the
purpose is to prove not to be benefited from many benefits.
147
F) The principle of Contribution
• It is the right of an insurer to call up on others which have similarly
liable insurers to the same insured to share the cost of an indemnity
payment;
• When there are two or more insurers insured a property in all of the
insurers at once and if there is a deliberate bad faith made by the
insured the claim will completely rejected if not can be covered by all
insurers.
• The principle of indemnity will operate in contribution.
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There are three conditions that contribution to apply:
(1) There should be a common peril up on the subject matter;
(2) There may be two or more insurance policy to cover the risk up on
their contributors if and only if there is a common peril up on the
subject matter; and
(3) If there is a difference in the policy of the peril that is going to be
insured, the principle of contribution will not apply.
The purpose of the principle of contribution is not to be paid over
insurance amount rather to compensate the insured the exact amount
that he claimed depending on their insurance contract.
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G) Principle of Proximate cause
• Proximate cause is defined as the active and efficient cause that sets
in motion a train of events which brings about a result without the
intervention of any force started and working actively from a new and
independent source.
• In insurance contract causation is the basic factor to compensate for
the damage or loss sustained.
• To arrive at a certain conclusion whether there is a loss or not to be
covered by insurance the cause and effect relationship must exist.
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• In insurance policy there are conditions identified as:
• Insured peril;
• Excepted peril; and
• Uninsured peril.
To evaluate proximate cause there are three issues on insurance policy
that must be observed:
A) If the loss is the result of the operation of a single cause, the loss is an
insured peril;
B) Successive causes-if the causes is resulted from the original cause and
is an insured peril the loss will be covered. However, if the
151
However, if the original cause is as the result of an excepted peril, the
loss will not cover; and
C) In case of concurrent causes
 there are three conditions that shall be observed:
1. If it is not an excepted (excluded) peril and if there is an insured
peril the insured (person) will get a cover.
2. When the insured peril and excepted peril are operating together
the policy will not cover such conditions created as the result of the
involvement of the excepted peril
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3. If it is possible to identify the damage caused by the insured peril and
the excepted peril, the part damaged by the insured peril will be covered
by the policy.
Sometimes the policies may cover the loss out of the nature of the
policy. For instance, when fire caught the house, they may use water to
make off (extinguish) the fire, due to this, the building collapsed. Then,
even though the building collapsed due to water, the cause of the
damage is originally fire. Thus, it should be covered under fire policy.
153
7.6: Assignment and Insurance
Concerning assignment of property, a person (assignor) can transfer his
right to any third party (assignee) and assignment of contact is possible,
however, they have limitations by law as mentioned below:
• If the contract assigned is to affect or going to affect the contracting
parties; or
• If it harms or affects the personal liberty of the person assigned. It will
be invalid or assignment is not possible; or
• If the contract is to increase the obligation of the debtor, it is also
invalid.
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How assignment of the subject matter of insurance is made?
• assignment of the subject matter which is the car is possible before the
contract is expired.
• If the subject matter is transferred to the third party, the insurance
contract terminates between the previous contracting parties
• In marine cargo policy, it can be assigned to a third party. Because of
the previous owner of the goods may be changed to other owners with
the bill of lading.
• Life insurance policy (contract) is possible easily to assign to another
person. It can be freely assigned
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The assignment may be absolute or temporary
• When the assignment is made to cover debt to the creditor like
pledge within a short period of time, it is temporary assignment.
• The assignment is said to be absolute like in the form of donation,
etc. it can be made by assignment or endorsement. In both cases, we
use as a means of transfer of right.
• However, in the case of assignment of right, there is a need of
separate or independent instrument to transfer a right from one to
another.
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7.7. Regulating Insurance Business
• Modern insurance started in Ethiopia at the turn of the century by the
then Bank of Abyssinia which was acting as an agent to foreign
insurance companies, 1923.
• The Bank was mainly issuing marine and fire policies.
• In 1951, the first local insurance company, through foreign initiated,
was formed. This was the old imperial insurance share company.
• The insurance proclamation 281/1970 managed to outline the manner
under which insurance companies should have been formed and what
control procedures they had to fulfill while operating.
157
• After the revolution, the companies were nationalized in 1975 and allowed
to continue as separate entities for one year until incorporated into one body
viz the Ethiopian Insurance Corporation under Proclamation No.68/1975.
• Today, because of the introduction of the free market economic policy in
Ethiopia, many private insurance companies are flourished to run insurance
business similar to that of the Ethiopian insurance corporation.
Why the government does interfere in insurance business?
• Because insurance is not only a business but also security of life and property
of the public.
• Thus, the government interferes through laws and appropriate government
institutions for the protection of public interest.
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How does the government protect the interest of the public?
1) The government protects the interest of the public through the
preservation of insurer’s solvency;
• The government protects or preserves the insurer’s solvency through
a capital requirement.
• For instance, under Art. 4(1) (b) proclamation no. 86/94 provides 3
million birr for general insurance;
• 4 million for long term insurance; and
• 7 million birr for both insurance business;
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• Deposit is required in a bank as provided under Article 4(1) (e) of this
proclamation;
• Margin of solvency is provided in the proclamation Article 20.
• Article 7(b) says the national bank of Ethiopia can cancel the
insurance business if the margin of solvency of the insurer falls
below the limit provided in Article 20 of this proclamation.
2) The government protects the interest of the public is by checking the
soundness of policy provisions and premium rate; and
3) The government protects the interest of the public by controlling and
supervising the activities of intermediaries.
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There are other additional reasons that a government intervenes to
insurance business. These are:
• The intervention of the government helps for the advancement of
insurance industry so that the public may get quality insurance
business services; and
• The government may achieve also use of insurance funds for economic
development.
The government intervenes to insurance business to meet the above
objectives through the National Bank of Ethiopia and the Federal High
Court because insurance is not only a business but a security of life and
property.
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