Thursday, March 25, 2021

Ethiopian Contract Law- Effects of Elements of Contract


Effects of Elements of Contract (Art, 1808-1818)

As discussed earlier, elements of contract are consent, object, capacity and form. Generally a contract that misses any of these elements is either void or voidable. Void and voidable contracts have differences and similarities. Let us first discuss the differences and then come to similarities.

Difference between void and voidable contracts (Art, 1808-1814)

Definition:  The deference between void and voidable contract emanate from the definition given to each of them. Void contract is a contract which parties intend to produce binding effect but does not actually have any legal effect. The obligation intended by the parties does not exist from the beginning. So, it is called void abinitio. But voidable contract is a contract that has begun to produce effect intended by the parties carrying with itself certain birth defects that may destroy the effect it has produced. Void contract is like the sperm cell meeting egg cell but unable to fertilize it. Parties made offer and acceptance but no fertilization. A void able contract is like a defective pregnancy. In such case fertilization has taken place and the embryo is growing but there is a possibility that the defect may lead to abortion unless such defect is removed medically or by any other means. If there is no fertilization the only option of the parties is to try the second chance but in case of defective pregnancy medical assistance may be sought without any need to attempt the second chance. Similarity, void contract cannot be cured but voidable contract may be cured by agreement of both parties to the contract (Art.1811). 

Cause:  A contract is said to be void when the object or form element are missed. The object is either immoral or unlawful/impossible or unclear. Or the special form required by the law or the parties has not been complied with. In short a contract is void if any of the Art 1711-1729 are violated (Art 1808 (2). But voidable contract is due to defect in consent or lack of capacity (Art.1808 (1).

Plaintiff: - Here, plaintiff indicates the person who brings void or violable contract to the attention of court.  Anybody, including public prosecutor, can bring void contract to the attention of court (1808(2). But in case of void able contract only a person whose consent was defective or the person who was lacking capacity at the time of conclusion of the contract can bring the case to the attention of the court(see Art.33 of Ethiopian Civil Procedure Code). For example, if E and D enter into contract of prostitution, either E or D or public prosecutor may bring such contract to the court’s attention. But if C threatened F to sign a contract or G, a minor, bought a bicycle from H, only F and G can bring the contract to court attention (Art 1808 (1)

Relief Sought this indicates what a person demands by bringing the contract to the court’s attention. In short it answers the question “what is he intending to get by alleging that elements of a contract are missed?” In case of void contract, the person is not intending to have the contract invalidated since there is nothing to be invalidated. Therefore, he wants either to make sure that the contract is void or wants the court to stop parties from violating the law/moral standard of the society under the guise of performance of contract. A person who is not sure whether or not the contract is void may want to get such assurance from a court. If the contract is found to be valid he may be liable to pay damage for non performance. Moreover, a good citizen or public prosecutor may also apply to court to stop the parties from performing illegal or immoral act. But in such later case the best thing to do is to report the case to police. Finally a person may apply to court to get back any thing he has given believing that the contract was valid.

Therefore, a party who is sure that the contract was void and has made no payment need not go to court and shall refuse to perform the contract (Art 1809). Any party claiming that the contract fulfills object or form can bring the case to court for performance and the missed object or form can be raised as a defense. 

Therefore, Art 1810 which provides about action for invalidation cannot apply to void contract. Firstly void contract is contract that does not exist; something which never exists cannot be destroyed. Secondly, the cause that made the contract void cannot disappear unless new laws are issued (David P 73, Tilahun P. 155). Incidentally, although invalidation does not exist, a person must claim reinstatement within ten year from the time date of conclusion of void contract (David, P 73, Art. 1845). 

On the other hand, voidable contract is a contract that has produced effect. Therefore, the relief sought is to have such contract declared void. Voidable contract produces legal effect unless the party whose consent was vitiated or incapable at he time of conclusion of contract challenges its validity (Art. 1808 (1). The contract will be cured where. 

A. Invalidation is not claimed within two years.  A party whose consent was vitiated loses his right to invalidate the contract unless he brings court action within two years from the moment he knew the fraud or mistake or from the moment the duress disappears (1810(1). The right will be absolutely barred if he has been unable to know the existence of defect in consent  or the duress  has not disappear with in ten years from date of conclusion of the contract ( Art 1845: Tilahun P. 155). In case of lesion the period of two years begin to count from date of conclusion of contract; not from the date a  person knows the  existence of lesion ( Art 1810 (2). Notice that a contract affected by incapacity need to be invalidated within two year from the date the person became capable (Art 1810 (1) Tilahun P. 155). 

B Contract is confirmed   a person whose consent is vitiated may waive his right to demand invalidation. Such waiver is a contract and has to be made in same form as the main contract (Art 1811(2). Notice here that the Drafter Rene David must have not been aware of the inclusion of Art 1811(2) in the civil code since he provided contrary to what is stated in the law (David, p .74).

C The injury is made good. A contract vitiated by lesion remains valid if the party taking undue benefit agrees to return such benefit (Art. 1812).

D. The vitiated provisions of the contract are avoided. Contract may be invalidated partially provided the valid one is independent of the invalid one (Art 1813).

This is like a surgical operation on human or animal organ. Incidentally; if a contract contains both lawful/moral and immoral/unlawful obligation, the immoral/unlawful obligation shall be considered as if not written and the remaining should be give effect, provided it is clear and meaningful. 
E.g. C and D agreed that D shall serve as a maid servant and she shall also make herself ready for sexual intercourse twice a week with C and C shall pay birr 400 per month ( G. Krzeczunowicz  P. 66)  Here the part dealing with sexual intercourse should be considered as if not written or ( does not exist).

The fact that voidable contracts are invalidated by the claim of the party affected by defect in consent or capacity may affect the security of the other contracting party since he is not sure whether or not the affected person will exercise his right of invalidation and if so, when he may claim invalidation. Art 1814 provides a solution to such insecure party so a party who does not have the right to invalidate the contract can, however, have the right to know whether or not the other party claims invalidation (Art. 1814 (1). If such party fails to respond within reasonable time the contract is deemed to be invalidated (Art 1814 (2). Notice that the word “cancelled” in Art. 1814(2) should be replaced by “invalidated”.

E.g. Abebe sold a bicycle to Solo, a boy of 14, in this example Abebe cannot claim the invalidation of the contract but he can ask Solo’s tutor whether he intends to confirm or invalidate the contract. If the tutor fails to give answer to Abebe, Abebe can presume the failure as invalidation. 

Notice also that Art 1814 does not apply to void contract since void contract cannot be invalidated. 

Similarities between Void and Void able Contracts (Art 1815-1818)  

As we have said void contract is devoid of any legal effect by its very nature and violable contract is devoid of legal effect by court decision only. So the following are similarities of void and voidable contract. 

Unable to Produce Legal Effect on the Parties like void contract voidable contract is also considered as void abolition once it is invalidated. Invalidation of voidable contract has a retroactive effect thereby denying the contract to produce any obligation from the moment of its inception. Contract is invalidated means the embryo is aborted. A mother who failed to conceive and a woman who aborted the pregnancy are in effect equal, since both have not borne a baby, and they have to try their second chance. Exactly the same is true for void and voidable contract. 

E.g. Abebe and Bekele entered into contract of sale of a house but did not make the contract in writing. And Shemsu was threatened by Belay, because of such threat Shemsu sold his house to Bacha, the contract was made in writing and signed by both parties and two witnesses. In both cases, the parties do not have obligation i.e. agreement is of no effect provided the court has declared the contract between Shemsu and Bacha void. 

Reinstatement (Art 1815-1818): Void contract and voidable contract that is invaliated do not produce obligation but parties might have made payment believing that the contract was valid i.e. such payment was made unduly or improperly. So a party who receives such undue payment shall give it back. Such giving back is called reinstatement Art 1815 (2). A contract was void or was made void does not mean that those who made undue payment will be without remedy (Art 1815 (2). 

Eg1. A sold a house to B for birr 300,000. and received the price but did not transfer ownership to B. if A refuses to transfer ownership of the house to B on the ground that a contract was not made in writing. he has to return the money he has received. 

Eg. 2.  Assume that C agreed to lend birr 350, 000 to D with interest at a rate of 12% per annum but further provided that contract shall be made in writing. However, C gave the money to D before the contract was made in writing. After a year C claims the payment of the money back with interest. Here D can refuse to pay interest since the contract was void but D has to pay back the 350.000 birr. 

Reinstatement is made either by returning back the payment (thing) received or by paying appropriate compensation for the thing that cannot be returned. In principle, the parties, to void contract (including that was made void), shall return the payment they received since such payment does not give any right to a person who received the payment (Art 1815 (1). For example, if A sells his horse to B because A was threatened by D to sell the horse, B cannot become the owner of the horse up on receiving delivery. In short, any delivery of a thing on the basis of void contract transfers neither ownership nor possession. Moreover, any transfer of ownership on the basis of void contract is also considered as if not done. So the title deed received on the basis of invalid contract does not entitle the holder to become the owner of the immovable (Art.1196(C).

In short, reinstatement is returning the thing that one has improperly received. Reinstatement presupposes performance. However, in its decision of Tikmt 29, 1998, File No.15551 in a case Ethiopian Technical Equipment Company vs. Ethiopian Motor and Engineering Company Federal Supreme Court Cassation Division erred in reasoning. The fact of the case was that the applicant bought a car from the respondent for birr 177,184.23 and paid the price. As a result the respondent transferred the car to Custom Authority warehouse from Djibouti port for custom clearing purpose. However; the Custom authority confiscated the car on the ground of illegal importation. Then the buyer lodged a claim in Federal First Instance Court for invalidation of the sale contract on the basis of illegal object. The court accepted the claim and ordered the seller to pay back the money he received. The defendant appealed against the decision of Federal High Court. The Federal High Court partially amended the decision by ordering the return of the car to Djibouti port. Appeal was brought to Federal Supreme Court and war rejected as unfounded. Finally the case was taken to Federal Cassation Court by the buyer. Although the Cassation Division properly affirmed the decision of Federal First Instance Court, it wrongly referred to Art.1817 (1). In the case at hand the seller has not yet delivered the car to the buyer and hence he cannot raise issue of reinstatement. Even if we assume that the car was confiscated after the buyer took delivery such confiscation amounts to non-performance on the part of the seller (see Art. 2343). So the seller (Ethiopian Motor and Engineering Company) did not have the right to claim reinstatement.

However returning the thing (payment) may be difficult. Therefore, in the following cases, reinstatement may be made by paying compensation. 

When Ownership of the Thing is transferred to Possessor in Good faith 

According to Art. 1161 whosever, obtains possession of corporeal chattel for consideration intending to acquire ownership will become an owner of such chattel if he believed that he bought the chattel from the true owner. So a person who lost his property on the basis of invalid contract cannot claim it from   such good faith possessor (Art 1164, 1167 cum. 1816). For example, Shaka threatened to rape Dagla’s wife unless Dagla sells his valuable house furniture to him. Dagla sold his furniture and delivered to Shaka. Shaka then sold the furniture to Bedilu, who did not know how Shaka got the furniture. In this   case therefore, although Dagla can get the sale contract invalidated for duress he cannot claim the   furniture from Bedilu. 

The same logic should also apply where a person obtains ownership title on immovable. For example, A sold his house in Hwassa to B for birr 350,000 since B provided a fraudulent letter of employment in Addis Ababa. Further assume that B was able to obtain transfer of ownership and title deed was issued in his name. B immediately sold the house to G for birr 450.000 and transferred ownership to G. Once G becomes an owner of the house by obtaining title deed A cannot claim the house from him since he become owner in good faith and for consideration. 

The other question in relation to Art.1816 is donation and rights other than ownership such as lease right, pledge and usufruct. We can argue that the only condition under Art. 1816 is good faith. Therefore, whosoever obtains right in good faith shall retain the right regardless of the nature of the right. However, while the interest of third party in good faith is a temporary right on the things returning such thing to the real owner is possible after such right is terminated.  

In short, if reinstatement of a thing is not possible because of right of third party in good faith, reinstatement shall be made by paying appropriate value of the thing at the time of execution of court judgment declaring the reinstatement. 

Loss or damage of the thing by fault of receiver

In principle, risk of loss or damage of a thing is born by the owner. Risk follows ownership. Ownership is transferred by delivery (Art 1186(2). But as indicated under art 1815(2) delivery does not transfer ownership to the receiver. Therefore; if the thing is lost or damaged, the receiver has no duty pay damage. For example, A sold his house to B for birr 350.000; A received 350,000 and B obtained possession and title deed, But the house was consumed by fire and B demanded the repayment of 350,000 on the ground that the sale of house was made orally. Here: B can get repayment of 350, 000 even if A cannot get his house back. 

However, the receiver should be responsible for a damage or loss due to his fault (Art 2028). The receiver has a duty to preserve and maintain the thing under his holding (Art -2321 (1). Failure to preserve and maintain the thing is, therefore; a fault (Art 2035). For example, A bought a cow from B for birr 5000 and the contract is void because of mistake but the cow died while in A’s holding because of A’s failure to take the cow to a veterinarian. A is liable to pay compensation.  Moreover; if in the above example A’s daughter of 14 gives toxic food for the cow and it died A is still liable. 

Obligation “to do” or “not to do”

In these two types of obligation, there is no transfer of ownership or holding. The contract requires the parties to perform certain intellectual or physical (labor) activities that benefit the other or to refrain from exercising certain property rights. So the concept of reinstating the parties by returning the thing does not work since there was nothing delivered. However a person can definitely lose certain economic advantage. For example A agreed to construct G +2 of E for birr 200.000, A and E agreed that contract becomes binding when made in writing. But A started construction by receiving all necessary construction materials from B. Before the construction is completed, B informed A that the contract is void. In this case, A has to stop construction but should be paid for the percentage he constructed. In short, acts done in performance of contract shall not be invalidated where such invalidation is not possible (Art 1817)

Transformation of the thing: - The receiver may substantially change or alter the thing he has received. In such case, returning the thing would involve serious disadvantage or inconvenience (Art. 1817(2). For example, Abebe sold 500 quintals of cement to Shemsedin for birr 100,000. Shemsedin received the cement and used it for construction. If Abebe got the contract invalidated on the ground of defect in consent Shemsedin cannot return the cement. Moreover, if the above construct is a sale of iron bar for construction and Shemsedin took delivery of the iron bar and cut it into pieces making it ready for construction he cannot return the iron bar since it is serious disadvantages to both Abebe and Shemsedin, Abebe may be unable to get market and Shemsedin also made expense to cut the iron bar, Therefore, where the thing is transformed, the receiver shall pay the price of the thing (Art 1817 (2). 

Returning the thing is uneconomical: The thing may not have been transferred, damaged, lost or transformed, but repayment expense may be high. In such case, the court should not order the repayment of the thing. Rather, it should order payment of compensation. For example, Mesobo Cement Factory sold 500 tons of cement to Hawassa Apartment P.L.C. The cement was transported from Mekele to Hawassa. Declaring such delivery as of no effect is uneconomical to both seller and buyer. 

In short, if the contract is invalid, any performance made on the basis of such contract becomes invalid. This means the receiver shall return the thing he received (Art 1815). However, if returning is not possible for whatsoever reason, an appropriate compensation shall be paid (Art 1817). 

Incidentally, this writer is of opinion that Arts 1815-1818 can be said redundant since they deal with issues covered under unlawful enrichment, especially under payment (Art 2162 – 2178). Such redundancy creates vagueness on the meaning of void and voidable contract. Once the contract is invalid, any relation between the parties is extra contractual and, therefore, Art 1815-1818 should be deleted. 

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