business law chapter 3&4 ppt.pdf Addis Ababa

Addis Ababa university colleges of business and economics department of Management business law ppt

1. CHAPTER - THREE
Business & Business Entities
@ExitexamworkAAU
1
Jion us telegram@ExitexamworkAAU

2. What is a business?
•For different set of reasons defining the term business in precise form is
difficult. This may be : Since business is always at transformation, lack of
uniformity through different places, the term business itself may either be
referred as the platform or otherwise.
•A combined readings of Commercial Code of Ethiopia defines business
as : “a platform whereby one could brought together corporeal and
incorporeal things for the purpose of carrying out any of the commercial
activities with the aim of generating income.
•Example : - Caterpillar is a company established for manufacturing
engineering machineries. The company render business by combining
together the plant (manufacturing plant), the business method or strategies,
electro-mechanical inventions and creativity, skills of professionals, the
trade name Caterpillar, Good business reputation (Good Will),
@ExitexamworkAAU
2
Jion us telegram@ExitexamworkAAU

3. •‘Corporeal Things’ includes things with body or form which includes
Movables (those tangible things which could either move by themselves
or by third party agent without losing their identity or character) and
Immovable (those tangible things which could either be land or house)
•Incorporeal things without body or form which includes Patent ( exclusive
or a monopoly ownership for industrial invention which is new), Copyright
(exclusive ownership for artistic and literary works or trade secrets), Trade
Mark ( a designated mark for goodwill on business good reputation).
•Business Person
•Article 2(2) of Proclamation 980/98 defines business person as :
“business person” means any person who professionally and for gain
carries on any of the activities specified in the Commercial Code
(Article 5) or who dispenses services, or who carries on those
commercial activities designated as such by law
;
@ExitexamworkAAU
3
Jion us telegram@ExitexamworkAAU

4. The essential question that any business person should ask is
designating a type of entity structure would optimize performance and
maximize profit? There are four modalities of doing business available
under Commercial Code of Ethiopia. These are :
SOLE PROPRIETORSHIP
(owner of a business) is a form of doing
business whereby one carrying-on business on his or her own name or
business name. Here, an individual owns, manages, and controls all
activities of the business. If you are operating the business by your self
you are operating as a sole proprietor. Ex. Eldad Barber. Here you are
not simply operating through trade name it does not mean that you have
established any form of business entity. Thus all of the income shall be
taxed as an income to business owner. Annual tax base for sole
proprietorship is 7,200 Birr. (Art. 19(2) Fed. Inc, Proc.). For 130,800 Birr
and above annual income the tax rate shall be flat rate 35%.
How are we going to decide form of doing business?
@ExitexamworkAAU
4
Jion us telegram@ExitexamworkAAU

5. Features of Sole - Proprietorship
•The owner and the business is one and the same.
•The major draw back for sole proprietoris the fact that there is
no liability protection. If the capital of the business can not cover
the debt of the business, then the creditors can collect it from
personal assets of the owner.
•The owner can take all the profit and loss.
•Only physical persons can do business in sole proprietorship.
II.
PARTNERSHIP
: -
•PARTNERSHIP IS A RESULT OF PARTNERSHIP AGREEMENT BETWEEN TWO OR
MORE PERSONS TO CARRY ON BUSINESS ACTIVITIES LEGALLY PERMITTED , AS
CO-OWNERS FOR THE PURPOSE OF GENERATING INCOME .
@ExitexamworkAAU
5
Jion us telegram@ExitexamworkAAU

6. Elements of Definition
•Partnership may either be established through an association of juridical
persons or physical persons or the union of both type.
•It is always a result of partnership agreement as between co-partners
manifested by words. As opposed to this companies may also be a result
of a statute. N.B. No agreement shall be valid if it allocate all of the profit
and losses. The common interest should be generating income.
•The partnership agreement includes the names, the portion of investment
or share each co-partner has in the partnership, the manner how losses
and profits shall be distributed among co-partners, exit and entry of new
partners etc.
• Except for the purpose of taxation, liability and property right (which could
either be determined at partnership agreement through originally brought
in to partnership or subsequent acquired on account of p/ship including
good will) . N.B. once the property injected to the partnership all partners
will have equal right to use.
@ExitexamworkAAU
6
Jion us telegram@ExitexamworkAAU

7. Features of Partnership

•Partnership is not artificial person like corporation. It is a common name of doing business
to co-partners
•Unless the power and duties of the co-partners is determined by the PA, there is mutual
agency principle run among co-partners. If there is anything left unstated in the
agreement statuary law ( the provisions of the Commercial Code) shall apply
•Save for otherwise provision in the PA, each partner do have the right to participate in the
decision making procedure. And unanimous decision is essential when the firm wants to
decide on assigning firm’s property or disposing such properties. etc.
•Joint several liability principle govern liabilities issue. Ex. If Mr. X has 100,000 Birr to
demand from firm set by A , B & C named ABC Partnership, he may claim either from
individually to the whole amount or by joining them together.
•Stipulated term or particular undertaking in specified agreement, will of co-parters death
of either of partner, operation of law as well as court decree can cause for partnership’s
dissolution.
•There is fiducially relationship govern among co-partners. The taxation is 30% flat rate on
annual taxable income. (Art . 19(1) of Fed. Inc. Tax Proc.

@ExitexamworkAAU
7
Jion us telegram@ExitexamworkAAU

8. 1.
TYPES OF PARTNERSHIPS
(Non – Commercial Partnership)
This is a type of partnership established for doing activities other than commercial
type. Ex. Ethiopian Coffee football club funs association etc. Here, the goal for the
association is different than economic
2. General Partnership : - This is the conventional mode of doing commercial
activities through partnership. All the characteristics discussed above are the
characteristics of general partnership.
3. Joint Venture : - unlike the above two, JV do not have legal recognition, lack of
publicity and tax payers identification. JV should be kept secret and unknown. If it is
known it would automatically converted in to general partnership. Ex. Bidding
4.Limited Partnership : - Combines the advantages of ease of running a
Partnership and separate legal entity status and limited liability aspect of a
Company. A limited partnership consists at least one general partner and one or
more limited partners.
@ExitexamworkAAU
8
Jion us telegram@ExitexamworkAAU

9. III. Companies
•Lord Justice Lindley defines company as : THE ASSOCIATION OF MANY PERSONS
WHO COMBINE MONEY OR MONEY WORTH TO A COMMON STOCK AND EMPLOY
IT FOR A COMMON STOCK AND EMPLOY IT FOR A COMMON PURPOSE ; A
COMMON STOCK SO CONTRIBUTED IS DENOTED IN MONEY AND IS THE CAPITAL
OF THE COMPANY; THE PERSON WHO CONTRIBUTED IT TO WHOM IT BELONG
ARE MEMBERS. THE PROPORTION OF CAPITAL TO WHICH EACH MEMBER IS
ENTITLE
•Companies may either be formed through laws or contracts (Charter).
•Is Company the property of the shareholders?
The traditional view that the company is the property of the shareholders now become
unacceptable. A company in the new socio economic thinking is a social institution having
duties and responsibilities toward the community in which it functions. Now, maximization of
social welfare is a legitimate goal than maximizing profit is the prime agenda. Thus
shareholders are regarded as not the owner of the company but supplier of capital entitled
no more than reasonable return (dividend). Hence, the company should responsible not
only to shareholders but also to employees, consumers, national monetary policy, member
of the community, and to the government and in some cases to the international community.
@ExitexamworkAAU
9
Jion us telegram@ExitexamworkAAU

10. Feature of Companies
qSeparate legal person distinct from incorporators (shareholders) from the date of
registration or incorporation ) hence,
(a)the company may sue or be sued in its own name,
(b)the property of the company belongs to the company,
(c)the company debt can not be regarded as the debt of the shareholders,
(d)the creditors of the shareholder cannot satisfy their claim on the company from
shareholders of the company,
(e)a shareholder of the company in its individual capacity can not bind the
company in any way.
(f)A shareholder of the company may enter in to contractual relationship with the
company,
(g)No mutual agency
(h)Perpetual Existence
q Companies do have well formed management structure. Such that there is no
mutual agency.
qAll companies are subject for 30% flat rate taxation
@ExitexamworkAAU
10
Jion us telegram@ExitexamworkAAU

11. Classes of Companies
•Depending of particular nature they have companies may either be
classified Private and Public.
i.Private Companies : - A private companies is one which by its articles
of association (a) restricts the right of the members to transfer their
shares if any; (b) limits the number of its members (not counting its
members) to 50 and (c) prohibit any invitation to the public to subscribe
for any shares in or debentures of the company (d) no need to sign the
prospectus (e) the minimum number of members required to setup
private companies.
ii.Public Companies : - the public companies do have the features of the
opposite of private companies. In Ethiopian context its referred as
Share Company. Share companies do have much extended version of
management structure.
@ExitexamworkAAU
11
Jion us telegram@ExitexamworkAAU

12. Law of Contract
@ExitexamworkAAU
12
Jion us telegram@ExitexamworkAAU

13. •Contract is the source of

o
bligation
.

The law of obligations lays down rules on
what a person should do to another or should refrain from doing on another.
Contract is defined under Article 1675 of the Ethiopian Civil Code defined as;‘’An
agreement whereby two or more persons as between themselves create, vary or
extinguish obligation of proprietary nature’’.


Formation of a Contract

A contract is an agreement giving rise to obligations which are enforced or recognized by law. The
law prescribes certain requirements that must be met for a contract to be valid and legally
enforceable. Article 1678 of the Civil Code laid down four basic essentials to the creation of a
contract:
i.Capacity
The ability to perform acts sustainable under the law.
ii.Consent (Consensus) or contractual intention;
The free expression of one’s
willingness to enter into contractual obligations.
iii.Object and;
The subject matter of the contract.
iv.Form (Formalities)
Whenever required by the law or parties so agree, a contract
may be made in a form prescribed by the law or agreed upon by the parties.
@ExitexamworkAAU
13
Jion us telegram@ExitexamworkAAU

14. Once it is seen that the essential conditions for the formation of a contract are met,
the consent of the parties to conclude a contract decomposes itself through a
process known as offer and acceptance.
–Offer in the law of contracts is a promise or a commitment of one party to do
or to refrain from doing some specified thing and creates a power of
acceptance on the offeree (the person to whom the offer is made) that would
transform the offer into a binding obligation.
–An acceptance is a voluntary act of the offeree whereby he exercises the
power conferred upon him by the offer, and thereby creates the set of legal
relations called a contract. At the beginning, the offeror has full power to
determine the acts that may constitute acceptance. Once he makes the offer,
however, the power to transform it into a binding contract shifts to the
person making the acceptance.
@ExitexamworkAAU
14
Jion us telegram@ExitexamworkAAU

15. Exchange of Offer and
Acceptance
Formations of Contract
@ExitexamworkAAU
15
Jion us telegram@ExitexamworkAAU

16. All contracts are made by the process of of a lawful offer by one party and the lawful
acceptance of the offer by the other party. X says, “will you buy my Toshiba laptop for Birr
20,000?. This is an offer If Y says “yes”, the offer is accepted and a contract is formed.
Proposal : -
An “offer” involves the making of “proposal”. The term proposal is defined as a situation
whereby one person signifies to another his willingness to do or to give something, with the
view of to obtaining the assent of that other to such act.
Offer: - A proposal is called an “Offer”. The person making the proposal or the offer is
called the Offeror. The Promisor or the person making the offer is called the offeree.
Acceptance: - When the person to whom the proposal is made signifies his assent thereto,
the proposal is said to be accepted. The person accepting the proposal or the offer is called
the ‘Promisee’ or the ‘Offeree’
@ExitexamworkAAU
16
Jion us telegram@ExitexamworkAAU

17. Ex. X offers to sell his bicycle to Y at the price of 5,000 Birr. This is the a proposal. X is the promisor or
the offeror. Y is the promise or the offeree. If Y agrees to buy the bicycle at the price stated; Y becomes
the promise or acceptor.
Types of Offer: -
i.Specific Offer : This is a type of offer made to specified person of specific group of persons.
ii.General Offer: - is a type of offer made to general subject without being specific to persons or group.
Rules of Offer
1.Offer should be Communicated either be Express by words, spoken or written and by
conduct or Implied: - if X offers Y to Sell his mobile phone with an amount of Birr 10,000.
2.An offer may be made to a definite person; to some definite class of persons; or to the world
at large
3.The terms of the offer must be certain, definite unambiguous and not vague
If X says to Y, “I will give some money if you find my cellphone. This is not an offer which can be
accepted because the amount of money to be paid is not certain.
1.A mere declaration of intention is not an offer ; Ex. Auction, price catalogue etc.
@ExitexamworkAAU
17
Jion us telegram@ExitexamworkAAU

18. Acceptance:-
The offer can be accepted by the person or persons for whom the offer is made.
If the offer made to a particular person can only be accepted by him or them
because he is or they are the only person or persons intended to accept.
Rules of Acceptance:-
i.If there is some variation even on unimportant point, between the terms of
the offer and acceptance, there is no contract.
ii.The acceptance with variation is not Acceptance
iii.Seeking Clarification is not an Acceptance
iv.It has to be expressed
v.Silence does not amounts to acceptance
vi.The mode of acceptance :

@ExitexamworkAAU
18
Jion us telegram@ExitexamworkAAU

19. Revocation of Offer
i.Withdrawal of offer before acceptance
ii.By lapse of time
iii.Expiry of reasonable time
iv.Death or incapacity of the offeror
v.Counter offer
vi.Refusal
An agreement which is not satisfy essential elements of a contract may be either
void or voidable. An agreement not enforceable at law is called void or void ab
initio. A void agreement has no legal effect.

@ExitexamworkAAU
19
Jion us telegram@ExitexamworkAAU

20. Defectesin Consent
Consentisthemeetingofmindbetweencontractingparties.Consentissaidto
begainedwhencontractingpartiesagreeoverthesamethingIthesame
manner.
Iftheconsentexpressedintheformofofferandacceptancedoesnotindicate
whattheoffereeortheofferorreallyintendedthenthereexistsdefectin
consent.Thecauseofdefectinconsentiseitherwronginformation(mistake,
falsestatement,fraud)orthreat(duress,reverentialfear,threattoexercise
rights)orlesion.Defectinconsentmaybeacauseforinvalidationofcontract
(Art1696).However,theexistenceofdefectinconsentdoesnotnecessarily
leadtotheinvalidationofcontract.Firstlydefectinconsentcaninvalidatea
contractonlyifapartywhoagreedtobeboundbecauseofinformationor
threatdemandsinvalidation(Art1808).Secondlyinsomecasestheparty
whoseconsentwasdefectivemaynotbeentitledtoclaiminvalidation(1708,
1709,and1710).
@ExitexamworkAAU
20
Jion us telegram@ExitexamworkAAU

21. Mistake(Art 1996-1703)
Mistakeisanerroneousbeliefthatapartymakes
misunderstandingonthecontentofthecontractorontheidentity
oftheothercontractingparty.Thepersonmighthavecommitted
suchmisunderstandingeitherbecauseofhisownpoorinference
fromgivenfactsorfalsestatementordeceitfulpracticeofothers
person.Onecaninvalidateoravoidhisobligationonthebasisof
mistakeifthefollowingtwoconditionsarecumulativelyfulfilled(Art
1997,1998).
•A/mistakemustbefundamental(Art1998)–Amistakeis
fundamentalwhenapersonmisunderstandstheobjectofthe
contractorthepersonwithwhomhehasenteredintothe
contract.Art1698defines“fundamentalmistake”
@ExitexamworkAAU
21
Jion us telegram@ExitexamworkAAU

22. The mistake must be decisive:
Themistakeisdecisivewhenthemistakenpartyprovesthatarational
personinhispositionwouldnothaveenteredintosuchcontract.
GoodFaithofMistakenParty(Art.1702)Thepartymistakenmustbe
readytobeboundbythecontractiftheotherpartyagreestobe
boundaspertheintentionofthemistakenparty.Heshouldnotusehis
mistakeasapretexttobeoutofthecontract.
•
Reparation(Art.1703)amistakenpartyisnotwithoutliability.Heis
accountableforanydamagethatmaybecausedtotheotherparty
(Art1703).Soinvalidationofcontractongroundofmistakeentails
paymentofdamages.Amistakenpartycanescapesuchliabilityonlyif
heprovesthattheotherspartykneworshouldhaveknownsuch
mistake(Art.1703)contracthaditnotbeenforthemistake(Art1697).
Mistakemaybemistakeoffactormistakeofpersonwhomonemay
contractedwith.
@ExitexamworkAAU
22
Jion us telegram@ExitexamworkAAU

23. Fraud (Art 1704)
•Fraudisanintentionalactofpreparingfalseinformationorchangingor
modifyingthecontentofthesubjectmatterofthecontractinamannerthat
cannotbenoticeablebyordinaryobservation.Frauddoesnotmeantelling
untruthorforbearingfromtellingthetruthitrathermeanmakingthingsor
documenttogivewronginformation.Suchactisdoneinordertoobtain
consentofapersontoacontract.Inordertoestablishfraudthefollowing
requirementsshouldbemet.
the fraud led him to commit decisive error
the fraud was committed by the party to the contract or he knew or should have
known the fraud or derived undue benefit.
False statement (Art 1705)
May be committed by misrepresenting or non disclosure
It should be commitedby contracting party only.
@ExitexamworkAAU
23
Jion us telegram@ExitexamworkAAU

24. Defect in Consent due to Threat (Art.1706-1709)
Apersonmaybethreatenedphysicallyorpsychologicallytomakeanoffer
ortoacceptanoffermadetohim.Insuchcasethepersonisdeclaringhis
intentiontobeboundasanalternativemeansofavoidingtheeffectofthe
threat.Inprinciplepartiesenterintoacontractforpurposeofderiving
economicbenefitbutincaseofthreat,bothoratleastoneofthepartyis
enteringintoacontracttoavoidapossibleriskthathasbeendirected
againsthim,hisrelative,hispropertyinterest.Sohaditnotbeenforthe
threat,thepersonwouldnothavedeclaredtobeboundi.e.intentiontobe
boundislacking.
Duress(Art.17061707)Duressiswarningthepartythatunlessheenters
intoacertaincontractcertainharmwillbedonetohim.Onecanraise
duressasacauseofinvalidationofcontractifthefollowingconditionsare
cumulativelyfulfilled.N.B.Duressmaybecommiytedbythirdpartyto
contract.
@ExitexamworkAAU
24
Jion us telegram@ExitexamworkAAU

25. Elements of Duress
•Thereisathreatorwarningtocauseharm.
•Theharmisonthepersonhimself,spousesorhisascendantor
descendants.
•Theharmisonperson,life,property,andhonor.
•Thepartybelievesthattheharmwillhappenifhedoesnotconsenttothe
contract.
•Thethreatshouldbeserious:
•Theharmisimminent
•Thethreatmustimpressareasonableperso
Reverentialfear(Art1709):-thisisapsychologicalthreat.Thethreatening
personisplayingagainstthepsychological(mental)feelingofthe
threatenedperson.Itisapsychologicalintimidationthatifthepersondoes
notgivehisconsenttobeboundbythecontracthewillbebelittledbysome
oneorthepublicingeneral.Itisinshortthefearofopinions.Reverential
fearisalsocalledundueinfluence(seeArt.868civilcode).
@ExitexamworkAAU
25
Jion us telegram@ExitexamworkAAU

26. @ExitexamworkAAU
26
Jion us telegram@ExitexamworkAAU

27. The Law of Agency
“You may be legally responsible for the acts of someone else”
@ExitexamworkAAU
27
Jion us telegram@ExitexamworkAAU

28. What is an Agency

The law of agency could be defined as the juridical relation which results from the
manifestation of consent by one person to another that the other shall act on his behalf and
subject to his control, and consent by the other so as to act. (Black’s Law Dictionary, 1991).
Article 2199 of the Civil Code of Ethiopia provides the definition that :
Agency is a contract whereby 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.
Key words :
Principal : is someone who confers on another the authority to act on their
behalf
Agent : the party on whom the authority is conferred or represent another in
dealing with third parties.
Third Parties : - the party with whom the agent dealing with on account of his
principal.
@ExitexamworkAAU
28
Jion us telegram@ExitexamworkAAU

29. Why do have Agency ?
q
Agency reduces the cost of contracting.
q The need to overcome time and space limitation:
q The need to overcome limitations of knowledge and skill:
q The need to represent legal person’s
q The Need to overcome incapacities
Ex.1 All traders who are registered for VAT are required to collect 15% VAT calculated up on a
given transaction. Hence, they are required to refund such amount to Ethiopian Revenues and
Customs Authority.
Ex.2 There are almost 1000 branch in all there are 1000 branch managers through them the
president of the Bank can be at different place at the same time.
Ex.3 If certain company receive a court summon the company must find professional lawyer who
is versed with special knowledge of lawyering.
Ex.4 Even though Coca Cola Inc, is a legal (Artificial) separate person the company can not
carried out its rights unless it hires General Managers and Plant Managers since it is a separate
real person .
Ex.5 traders who are registered for VAT are required to collect 15% VAT calculMinors , insane
persons, bankrupted persons, judicial interdicted persons can not exercise their right of
contracting unless they carried out using their tutors, trustees,
@ExitexamworkAAU
29
Jion us telegram@ExitexamworkAAU

30. Sources of Agency
qAuthority derived from a C
ontract
: -
qAuthority by
Judicial Act.
qAuthority Derived
from the Law
.Tests of Agency (How do we know Agnecy Relationship exists?)
Agency many proven if the following three particulars are present :
q Authority run between the Principal and Agent (Law, Contract, Judicial Rulings)
q Being subject of Control (not micro management but control the relationship)
q The Agent has to be acting on behalf of the principal
Ex. A General Manager of a certain PLC is an agent of that PLC. Hence, his
authority is derived from Articles and Memorandum of Association of the Company.
He should represent the company and carried out his authority with in the scope of
power given by the company Articles of Incorporations. His power is controlled by
the General Assembly of the company.
@ExitexamworkAAU
30
Jion us telegram@ExitexamworkAAU

31. Scope Of Authority (to what extent should the agent serve his principal?)
Formation of Agency
An agency is usually created by agreement between the principal and agent,
but in some situations an agency can be created without such an agreement.
The main ways in which an agency can be formed are as follows:
qExpress Appointment. This is the main way in which an agency is
created. A principal will expressly appoint an agent either to carry out a
particular job or to undertake a range of transactions. The relationship
between the principal and agent will usually be contractual.
qBy Implication. This form of agency usually arises where there is a pre-
existing agency relationship and it is assumed by a third party that the
principal has given the agent authority to act as an agent in matters not
covered by the express appointment. This implied or ostensible authority
may arise from the position held by the agent
@ExitexamworkAAU
31
Jion us telegram@ExitexamworkAAU

32. For example, a company secretary has implied authority to enter into
contracts on behalf of a company which are related to the day-to-day
operation of the business
qBy ratification. This arises where a principal retrospectively adopts a
contract made on his behalf by an agent. Ratification will only be effective
if strict conditions are met:
■
the agent must have disclosed that he was
acting for a principal;
■
the principal must have been in existence when
the agent entered into the contract, e.g. if the principal is a company, the
certificate of incorporation must have been issued;
■
the principal must
have had the capacity to enter into the contract not only when the contract
was made but also at the time of ratification;
■
the principal must ratify the
whole contract;
■
ratification must take place within a reasonable time.
qBy Necessity. This type of agency arises where a person takes urgent
action on behalf of another in the event of an emergency. There will
normally be some kind of pre-existing contractual relationship between the
parties, e.g. a contract to transport perishable goods.
@ExitexamworkAAU
32
Jion us telegram@ExitexamworkAAU

33. The person who purports to act as an agent of necessity must show that he
acted in the best interests of the ‘principal’, his actions were reasonably
necessary in the circumstances, and that it was impossible to contact the
‘principal’ to obtain instructions.
qApparent (Ostensible) Agency Apparent authority is not an authority
arising from the consent of the principal whether express or implied
according to the rules discussed in the preceding section. The agent’s
authority here is the product of the principal’s conduct, his conduct that the
agent is authorized to act on his behalf. It is an authority which apparently
exists, having regard to the conduct of the parties. In fact/reality, it does
not exist; but as a matter of law arising out of the factual position of the
parties in the eyes of third parties. This might be happened (a) if in the
situation that the principal failed to receive Power of Attorney from the
agent, (b) if the principal failed to communicate partial or full revocation of
power of attorney to third parties or (c) where any statement or conduct of
principal lead third parties to believe that there is agency relationship
.
@ExitexamworkAAU
33
Jion us telegram@ExitexamworkAAU

34. Modes of Representation
1. Disclosed (Complete) Agency
Disclosed agency is the mode of representation in which the agent reveals the name of the
principal to the third parties with which he/she is interacting (on behalf of the principal).
Disclosed agency is recognized under Art 2189(1) of the civil code in such a way that the
representation of the principal by the agent shall have the effect of affecting the principal
when the agent discloses the name of the principal.
“Contracts made by an agent in the name of another within the scope of his power shall be deemed to have been
made directly by the principal” Art 2189(1).
•
The effect of agency springs from this provision of law of agency, that is, the name of the
principal disclosed to the third party and the agent acting within the scope of his power.
Therefore the name test, disclosing the name of the agent or the agent acting in the name
of the principal is on essential element of agency under the Ethiopia law. Hence, the agent
acting not in his own name or in the name of any other person but in the name of the
principal makes the mode of representation disclosed agency. By the same token the third
party enters into contract with the agent with the full knowledge that the person with who
he/she is interacting is the agent and whose name as a contracting party is stated is the
principal.
@ExitexamworkAAU
34
Jion us telegram@ExitexamworkAAU

35. II.
Undisclosed

Agency: -
Art. 2197 agent acting on his own name
(1) An agent who acts on his own name shall personally enjoy the rights or incur the liabilities deriving from the
contracts he makes with third parties, notwithstanding that such third parties know that he is an agent.
•
Undisclosed agency is the mode of representation in which there is no disclosure of the fact
that the front person is acting on behalf of another person. That is neither the fact that he is
acting on behalf of another person nor the name of another person is made known to the
third party contracting. Therefore, the agent acts on his own name and he is acting on his
own behalf. The latter is inferred from the situation where the third party is not aware of the
fact that the agent is acting to the benefit and on behalf of another. This form of
representation is inferred from the expression of Art 2197(1) last proviso. That is “, ---
notwithstanding that such third parties know that he is an agent.” This last mode of
representation does not bring any effect of agency. Yet, the person who acts in his own
name and on his own behalf shall enjoy the benefits or liabilities himself. By way of
conclusion, only disclosed agency which is termed as complete agency under Art 2189 of
the Civil Code shall bring effects of agency. The other two forms of agency explained under
Art. 2197 of the Civil Code are not
@ExitexamworkAAU
35
Jion us telegram@ExitexamworkAAU

36. The Duties of The Principal and Agent
Duties of Agents to their Principals
The agent has various duties which he owes to his principal. Some of these arise
out of the contract of agency, others apply in varying degrees, depending on
whether the agency is for reward or gratuitous, and are implied.
(a)Duty to Perform
The fundamental duty of an agent appointed under a contract is to
carry out the agency contract in accordance with its terms, express or implied, and not
exceed his authority. If the Agent is appointed and instructed to sell goods for cash only.
Instead, he sold them, and accepted a post date cheque in payment. If the cheque
later found dishonored. Then the agent is liable for the price.

(b)Duty to Obey Instructions
An agent is required to comply with all reasonable
and lawful instructions given by the principal in connection with the subject-
matter of the agency, or the manner of carrying out his duties. This duty can, of
course, be modified (or even excluded altogether) by the terms of the agency
contract – and it is, in many cases, subject to the custom and usages of the
trade.
@ExitexamworkAAU
36
Jion us telegram@ExitexamworkAAU

37. (d).
Duty to Perform the Contract with Diligence It will, normally, be implied in
every agency contract that the agent will carry out his duties with reasonable
diligence. If he is unable to carry them out within a reasonable time, or is not
prepared to, then he has a duty to notify his principal of this fact. This is no
more than the requirements placed on a party to any contract to perform it
within a reasonable time if the contract does not specify a time for performance.
(e).Duty to Exercise Due Skill and Care The common law duty of an agent
acting for reward is to exercise such skill and care in performing his duties as is
reasonable and normal in the trade, profession or business in which he is engaged.
(f)Fiduciary Duties An agent is said to be in a fiduciary relationship towards his
principal – he is, loosely speaking, in a position of trust. However, he is not a
trustee in the legal sense. A trustee owes a higher degree of integrity and duty
towards his beneficiary than an agent does towards his principal. Perhaps, we can
best sum this up by saying that an agent must behave honorably and loyally in all
his dealings with his principal. Having said that, let us look at the various situations
in which an agent is required to behave in a certain way.
@ExitexamworkAAU
37
Jion us telegram@ExitexamworkAAU

38. Rights of Agents Against Principals
An agent has numerous duties and responsibilities vis-à-vis his principal – but he also has
rights.(a) Payment It is interesting that an agent is not entitled to any payment or
remuneration for his services as of right. His only entitlement is if the
contract of agency expressly or by implication provides for it. This means
that a non-contractual agent has no entitlement to be paid, and is truly what
he is called – a “gratuitous agent”. On the other hand, where the agency is
contractual, and the agent is in the course of a business as such, then
remuneration will be very readily implied if the contract makes no express
provision for it. In the case of professional agents who charge on a fixed
scale, this scale does not automatically apply, unless it can be shown that a
term of the contract, express or implied, so provides. Frequently, however,
in such cases, the custom of the trade or profession will ensure that the
scale is implied into the contract.
@ExitexamworkAAU
38
Jion us telegram@ExitexamworkAAU

39. Indemnity (
Duty to reimburse outlays and Experts:

An agent is entitled to be reimbursed all expenses properly incurred on the principal’s behalf, and
to be indemnified against all losses and liabilities incurred in the execution of the agency. This is a
general rule, and subject to exceptions, especially in the case of expenses. It may very well be that
the contract envisages, or expressly provides, that the expenses incurred by the agent are
included in the commission or fee paid. The custom of the trade or profession will, often, be an
important factor.

Lien
: - All agents,, have a lien on the goods or chattels of their principals in respect of lawful claims they may
have against them for remuneration, charges, loss, or liabilities incurred in the course of the agency. However,
the lien of an agent can be displaced by express or implied agreement in the agency contract, or if goods or
chattels are delivered to the agent for a special purpose or directions for disposal are given inconsistent with
the agent’s lien. Normally, the lien of an agent is a “particular” lien – that is, it applies only to goods or chattels
being retained by the agent as security against debts or liabilities arising in respect of those particular goods
or chattels. In other words, if an agent has in his possession goods in connection with one transaction, he
cannot exercise his lien over those goods in respect of debts which arise in connection with a separate
transaction. However, a particular lien can be extended into a general lien by agreement. A general lien
applies to all goods or chattels of the principal which are in the agent’s possession. Or the agent can exercise
a lien over the principal’s goods and to stop them in transit where payment is outstanding.
@ExitexamworkAAU
39
Jion us telegram@ExitexamworkAAU

40. Termination of agency
The agency may come to an end either by the actions of the parties or by
operation of the law.
1 Termination by the Parties. The principal and agent may terminate their
relationship by mutual agreement or the agency contract may allow either party
to terminate by giving notice. Even if the contract does not provide for termination
by notice, either party can end the contract unilaterally by giving reasonable
notice.
2 Termination by Operation of the Law. The relationship will come to an end
automatically with the death or insanity of either party or by the bankruptcy of the
principal. The agency can also come to an end because of frustration or illegality.
@ExitexamworkAAU
40
Jion us telegram@ExitexamworkAAU

41. The Law of Sale of Goods
Special Contracts II
@ExitexamworkAAU
41
Jion us telegram@ExitexamworkAAU

42. What is contract of sale ?
A contract of sale of goods is defined under Article 2266 of the Code Code of Ethiopia
as :
A CONTRACT OF SALE IS A CONTRACT WHEREBY ONE OF THE PARTIES, THE SELLER (the
person who sells or agrees to sell goods), UNDERTAKES TO DELIVER A THING AND TRANSFER
ITS OWNERSHIP TO ANOTHER PARTY, THE BUYER (the person who buys or agrees to buy
goods), IN CONSIDERATION OF A PRICE EXPRESSED IN MONEY WHICH THE BUYER
UNDERTAKES TO PAY HIM.
In this Civil Code, unless the context or subject matter otherwise requires, ‘contract of
sale’ includes an agreement to sell as well as a sale”. Where under a contract of sale
the property in goods (the ownership) is transferred from the seller to the buyer the
contract is called a ‘sale’.
•The transaction is said to be sell even though the price is payable at some future
date provided that the the ownership of the goods is transferred.
•Where the transfer of goods is set for some future date subject to some condition to
be fulfilled later, the contract is called a contract of sale.
@ExitexamworkAAU
42
Jion us telegram@ExitexamworkAAU

43. Subject-matter of the Contract of Sale
ART. 2267. - APPLICATION OF THIS CHAPTER. - 1. CORPOREAL CHATTELS.
(1) THE PROVISIONS OF THIS CHAPTER SHALL APPLY TO THE SALE OF CORPOREAL
CHATTELS.
It is clear from above provision that the contract must be in respect of
“Corporeal Chattels” or “Goods”. “Corporeal Chattel or Goods includes all
personal chattels other than things in action and money; and in particular
‘goods’ includes emblements, industrial growing crops, and things attached
to or forming part of the land which are agreed to be severed before sale or
under the contract of sale”.
“Things (or choses) in action” are intangible rights that cannot physically be
handled – such as patents, copyrights, shares, securities, etc. – and
“emblements” are products created by annual industry, or the profits of a
crop which has been sown.
@ExitexamworkAAU
43
Jion us telegram@ExitexamworkAAU

44. Class of Goods
Goods fall into different categories, and inevitably somewhat different rules
must apply to them. The Civil Code breaks them down into “existing goods”
and “future goods”.
•“The goods which form the subject of a contract of sale may be either existing
goods owned or possessed by the seller, or goods to be manufactured or
acquired by him after the making of the contract of sale, in this Civil Code called
future goods”.
•Secondly, goods can be “specific”, “ascertained”, or “unascertained” are
goods which are identified and agreed on at the time a contract of sale is
made”.“Unascertained” goods are not defined by the Act, but by necessary
inference mean goods which have not been specifically identified at the
time of the contract as the actual goods, the ownership of which will pass
to the buyer.
@ExitexamworkAAU
44
Jion us telegram@ExitexamworkAAU

45. (a)Existing Goods They are goods which are actually in existence – that is, substantially in
a state in which the possession of them is capable of being transferred, at the time the
contract of sale is made.
(b)Future Goods These are goods which are not in existence at the time of the contract.
Therefore, there cannot be a sale of them at that time, but only an agreement to sell when
the goods are actually in existence. S.5(3) makes this clear: “Where by a contract of sale
the seller purports to effect a present sale of future goods, the contract operates as an
agreement to sell the goods”. Goods that fall into this category may have to be
manufactured before they become specific, or they may have to be grown. A contract to
sell next year’s barley crop from a particular field is an agreement to sell that crop when it
has been grown. An agreement to sell future goods is, of course, a contract like any other,
and if the seller fails to produce the goods at the proper time he (or she) will be in breach.
There are, however, two points to note. Firstly, this is one area where equitable principles
do not apply. A buyer cannot get an order for “specific performance” of a contract for
future goods.
@ExitexamworkAAU
45
Jion us telegram@ExitexamworkAAU

46. (c) Specific Goods Specific goods are not only existing goods but are
essentially the actual goods which will pass under the contract. If you want
to buy a dozen screws, you can go to a DIY shop and take off the shelf a
packet containing 12 screws. These are specific goods.
(d) Ascertained Goods Ascertained goods are goods identified by both
parties, e.g. “two of those bottles of port”. In the Act, they are treated as
specific goods.
(e) Unascertained Goods are Goods which are in existence (usually), but
which have not been specifically identified as the goods forming the subject
- matter of the sale, are “unascertained”. When they have been so identified,
they become “ascertained”.
@ExitexamworkAAU
46
Jion us telegram@ExitexamworkAAU

47. Passing of Property (Transfer of Ownership)
Goods – at least specific goods – are tangible things which you can physically
handle. But the mere fact that I can handle something does not necessarily
mean that I own it. I may have found it abandoned, or have been lent it, or
have stolen it. In none of these instances am I the rightful owner. There are
then four definitions which are fundamental, and which occur throughout the
subject. It is most important not to confuse them.
§Property The “property” in goods is the ownership of them – the highest right
to those goods that a person can have.
§Title “Title” to goods is often used as being synonymous with “property”. But
strictly it is the “right” to a person’s property in goods, or the means whereby
the right has accrued to him, and
@ExitexamworkAAU
47
Jion us telegram@ExitexamworkAAU

48. by which it is evidenced. Or, as Blackstone defined it over two
centuries ago, “the means whereby an owner has the just
possession of his property”.
•Possession This is the physical control of the goods, or possession of
them. It has no necessary connection with the property in them. If I
steal something, I have possession of it, but I do not have the
property in it, nor any title to it. Indeed, I do not even have a right to
possess, and the right to possess may be vested in X, neither in me
nor in the owner.
•Risk The “risk” in goods is the responsibility for loss, damage or
destruction of those goods. It is not necessarily coincident with
either property in or possession of those goods. We shall be dealing
with “risk” in the next study unit.
@ExitexamworkAAU
48
Jion us telegram@ExitexamworkAAU

49. Modes (Methods) of Transfer of Title
How do we transfer ownership of goods ? : - The subject matter of sale
contract is corporeal chattel (movables). Hence, the mode of transferring
ownership for corporeal chattel is delivery.
Delivery is the voluntary process of handing over goods from one hand to
another. Ex. 1 Mr. B agreed to purchase 1000 tones of cement from Muger
Cement Factory to be delivered after six months. Here the cements are not
present and yet to be manufactured. Ex. 2. Mr S agreed to supply steel bar
for Mr. B. however those steel bars are in Turkey to be imported. Thus
although the goods existed at the time of contract, they are at ownership of
third parties.
1. Actual (Physical) delivery : - This mode of delivery refers to physical
handing over of goods from the seller to the buyer. Ex. Mr. B purchase 100
bar of soap from S, then S handover soaps packed through carton. Here
goods are actually transferred from S to B.
@ExitexamworkAAU
49
Jion us telegram@ExitexamworkAAU

50. 2.
Symbolic Delivery
:
As opposed to actual delivery, symbolic delivery refers to mode of delivery
where goods are not delivered to the buyer except for something that
represent the goods. Ex. Warehouse receipt
3.
Constructive Delivery
: - If 3
rd
party possess or keeps the goods
acknowledging that the goods are hold for account of the buyer. Ex. If Mr. S rent his
generator to TP after one month S sold this generator to B. then since the rent for
generator was for six months TP acknowledge that he will keep the item to B.
4. Delivery with Short Hand (Traditio longa manu ) : here the buyer already
takes the possession of goods before contract of sale. Ex. If Mr. S rent his
generator to B after one month he decided to sell the same to B. Then since B has
already took possession, it is called delivery at short hand.
5. Constructive bravi manu : This is when the seller takes the possession after
having sold the goods to the buyer. Ex. If Mr. S sales his generator to Mr. B and
rent the same generator from B. then he acknowledge that he will keep the item for
account of B.
6. Delivery to whar finger or currier : - Here the delivery is not made to the buyer
but it is made to the buyer through currier. EX DHL or EMS .
@ExitexamworkAAU
50
Jion us telegram@ExitexamworkAAU

51. Place of Delivery (Where should the Seller handover the goods?)
•The civil code does provide the place where, at the time of the contract,
the Seller had his place of business or, failing such, his normal residence
shall be the place of delivery.
•Time of Delivery
If a time is stated in the contract for the delivery of goods, it
may be a condition of the contract, breach of which entitles the buyer to
cancel the contract and refuse to take delivery; or it may be a warranty,
which entitles the buyer only to seek damages for any loss entailed by
reason of late delivery.
•If, therefore, the contract does not expressly state that time shall be of the
essence, or make any other statement to the same effect, the law looks to
the nature of the contract and the character of the goods dealt with to
resolve the question
@ExitexamworkAAU
51
Jion us telegram@ExitexamworkAAU

52. Warranties
“Warranty” is a term of a contract breach of which entitles the injured party to damages, but not
to rescind the contract. “Warranty means an agreement with reference to goods which are the
subject of a contract of sale, but collateral to the main purpose of such contract, the breach of
which gives rise to a claim for damages, but not to a right to reject the goods and treat the
contract as repudiated.” It is therefore used in precisely the same sense in a contract for the
sale of goods as in other types of contract.
1. Warranty of Dispossession: it is an obligation of the seller that the seller shall warrant the
buyer against any total or partial dispossession, which he might suffer in consequence of a third
party exercising a right he enjoyed at the time of the contract. Hence the seller can not transfer
to buyer what he does not own.
2. Warranty against Defects in Goods: The seller shall guarantee to the buyer that the thing
sold conforms to the contract and is not affected by defects in addition to the warranty of
dispossession. Non conformity may be present when goods
@ExitexamworkAAU
52
Jion us telegram@ExitexamworkAAU

53. Warranty against Defects in the Thing:
The seller shall guarantee to the buyer that the thing sold conforms to the contract and is not
affected by defects in addition to the warranty of dispossession. Non conformity may be present
when goods
Does not possess the quality required for its normal use or commercial exploitation; Ex. S
and B agreed for sale and purchase of marker for white board. However S delivers chalk.
Does not possess the quality required for its particular use as provided expressly or impliedly
in the contract; (warranty of fitness for particular use)or; B agreed to buy paint for his iron
sheet doors and windows with S. Yet S delivers paints for walls.
Does not possess the quality or specifications provided expressly or impliedly in the contract
(warranty of fitness specified in the contract). Ex. B agreed to buy Computer from S detailing
that he needs it for editing and graphics works and required him 1TB HD, 21’ Inch Screen
width, Speed with 32GZH HP branded computer. However S delivered 500GB HD, 15’ Inch
Screen width, Speed with 6GZH Toshiba brand.
Where the seller delivers the correct type of quality of goods mixed with others of a different
description not included in the contract, the buyer can reject the whole, or he can accept the
correct goods and reject the incorrect ones. Although the Act does not in this instance specify, it
must be implied that if the buyer adopts the latter option, he must pay at the contract rate for the
goods he accepts.
@ExitexamworkAAU
53
Jion us telegram@ExitexamworkAAU

54. Warranty Against non Conformity
A seller, in addition to warranty against dispossession and defect, has the obligation to
warrant against non-conformity of the thing.
A
s per Article 2288(1) which provides that:
The thing shall not be deemed to conform to the contract where:
(a) The seller delivered to the buyer part only of the thing sold or a greater or lesser quantity
than he had undertaken in the contract to deliver; or Ex. if the seller agrees to deliver 10000
quintals of Derba Cement, he breaches the warranty against non-conformity when he
delivers cement with 5000 quintal or 11000 quintal.
(b) The seller delivered to the buyer a thing different to that provided in the contract or a
thing of a different species. Ex. if the seller agrees to deliver a Sony TV set, he breaches the
warranty against non-conformity when he delivers a tape recorder or JVC TV set as tape
recorder is a different thing and JVC TV set is a thing of different species.
•
@ExitexamworkAAU
54
Jion us telegram@ExitexamworkAAU

55. Duties of the Buyer : -
A.Obligation To Pay Price
The buyer has the obligation to pay the price and take delivery of the thing. The price is the amount of
money that the buyer undertakes to pay to the seller in consideration of a thing. It is the cost at which a thing
is bought.
The buyer must appropriately discharge all obligations under contract to avoid suit on non- performance of
contract of sale. In this regard, article Art. 2303 provides that:
(1)The buyer shall pay the price and take delivery of the thing.
(2) He shall be bound by any other obligation imposed upon him by the contract of sale.
The obligation of the buyer to pay price includes the obligation to take any steps provided
by the contract or by the custom to arrange for or guarantee the payment of price, according
to Art 2304. For example, the contract of sale may provide that the buyer should pay the
price in check. In this case the buyer must open account in bank and deposit money in the
bank from which he orders payment to the seller. Thus, the buyer fails in his obligation to
pay price if he does not open an account in a bank. The parties to the contract may agree
that the buyer would pay the price after delivery of the thing provided the buyer gives
security to the seller. In such case, the buyer’s obligation to pay price includes the obligation,
for example, to give surety.
@ExitexamworkAAU
55
Jion us telegram@ExitexamworkAAU

56. Obligation to take delivery of the thing
The buyer must take necessary steps to complete the delivery according to article 2313
which provides that: It include the obligation to go to the place of the business of the seller
and physically receive the thing from the seller or to keep the buyer’s store opened if
delivery is to be made at the buyer’s place.
@ExitexamworkAAU
56
Jion us telegram@ExitexamworkAAU

57. Quality of Goods Delivered
The Civil Code of Ethiopia makes provision for the buyer’s rights should the seller deliver the wrong
quality of goods. The seller has a strict duty to deliver the precise quantity stipulated in the contract,
and if he fails to do so the buyer is entitled to reject them. The following are sets out as the buyer’s
options:
•Where the seller delivers less than the correct quantity, the buyer may reject them all. But if he
does accept what has been delivered, he must pay pro rata at the contract rate (e.g. if the contract
was for 10 articles at ETB 1 each, and 8 are delivered, then if the buyer accepts them he must pay
ETB 8).
•Where the seller delivers more than the contract quantity, the buyer has three options – he can
reject the lot; or he can accept the correct quantity and reject the rest; or he can accept the whole
lot, and pay at the contract rate for all.
•Finally there is a let-out, in that the section is “subject to any usage of trade, special agreement, or
course of dealing between the parties”. In spite of the seller’s duty to supply the correct quantity
being strict. This means that if the difference in quantity is minute, and such as not to have any
effect on the contract as a commercial reality, the buyer will not be permitted to take advantage of a
trivial variation in order to escape from his liability to accept and pay.
@ExitexamworkAAU
57
Jion us telegram@ExitexamworkAAU

58. The Law of Insurance

Special Contract III
@ExitexamworkAAU
58
Jion us telegram@ExitexamworkAAU

59. Why we need Insurance ?
•we need to have an insurance because there is always a potential financial or economical risk
present. Risk can simply be defined for insurance purpose as the chance of loss. Since the term
loss could mean different, we use the term stick to loss which are economic or patrimonial in nature.
Hence, emotional or moral loss cannot be the subject matter of insurance. Persons may be
exposed to financial loss, subject to risk due to the properties we have or for whom we assume
responsibility.
•N.B. Insurance is always compensate a risk of pure (where there is only the chance of loss)
economic loss.
Insurance could be defined as a co-operative social devise which spreading the chance of loss among
the large number of people exposed (vulnerable) to the same risk. The manner how insurance
distribute and transfer risk is described herein below.
•Total number of event (Risk) insured per annum X the value of insured
•Total number of insured at the same risk
If there is 10,000 owners of pick up vehicle and if the annual frequency of occurrence of damage on
vehicle is 25 and the invoice value of such vehicle is 500,000 ETB, then, the premium shall be :
25 X 500,000 = 1,250 ETB (the Premium
10,000
@ExitexamworkAAU
59
Jion us telegram@ExitexamworkAAU

60. Types of Risk
Pure Risk : is a type of risk where there is only the chance of loss or chance of gain. Ex. No
one could benefit from being infected by cancer. No company can get profit out of the
destruction of plant or office equipment.
Speculative or Calculative Risk : - as opposed to pure risk, speculative risks are risks
whereby there is both the chance of loss or gain. Example: - the winner of lottery ticket. The
holder of lottery ticket has both the option of being the winner of the game or being loser of
the game.
Insurance is always meant for a type of loss which is pure one. In addition to that, insurance
can only be make good material loss. Therefore, no emotional or moral damage can be the
subject matter of insurance policy.
@ExitexamworkAAU
60
Jion us telegram@ExitexamworkAAU

61. How Do We Create Insurance?
Insurance is always a result of contract often called Policy. An insurance policy is a contract between the insurer
and insured, whereby the insurer undertakes to pay the insured a fixed amount in exchange for a fixed sum
(premium), on the happening of a certain event (such as attaining certain age or death or damage on property as a
result of fire or may be incident on ship under expedition), or compensate the actual loss when it take place, due to
the risk insured.
Natures of Insurance Contract
It is an adhesive contract :- it is adhesive because it is prepared by the insurance company. The insured do not has
an option to negotiate over terms and conditions of the contract. In Ethiopia the policy of insurance contract is
approved by the National Bank of Ethiopia. Thereby the insured is only expected to agree or not to agree on the
terms and conditions of the contract.
It requires a written formality : - No insurance contract shall be considered valid unless it is made through written
paper. This the formal requirement of insurance contract is required for validity purpose. In other words no verbal
agreement for insurance is considered to be valid
.
In the Ethiopian context the insurer is always a juridical person :- under Ethiopian context only share companies
are allowed to render insurance business. Henceforth, no business organization other than Share companies are
allowed to offer insurance policy in Ethiopia. Thus, unless artificial person or juridical person organized in the form
of Share Company no natural person can render insurance business.
Insurance is a mechanism to distribute financial risks to among the club who are vulnerable to the same
risk. : - Insurance products are distributed to member of person who are vulnerable to the same kind of risk.
The Object of Insurance contract is to indemnify the insured who sustain material damages :- thereby no
moral or emotional damage may be considered to be the object of insurance policies.
@ExitexamworkAAU
61
Jion us telegram@ExitexamworkAAU

62. Essential Principles of Insurance
1. Utmost Good Faith (Uberimie Fidie) : -
Insurance business is relay on the good faith of the parties to such
engagement. Such that, both the insurer and the insured should communicate each other clear pertaining material
or detrimental facts of the insurance package as well as terms and conditions thereto. Hence, the insurer should
disclose to the insured as to the scope of coverage of the risk insured as well as grounds whereby the insured
shall not entitled for compensation (claim). In other words, the parties need to disclose each other as to the
material facts detrimental to the formation of such contract. One can commit a breach of utmost good faith then he
misrepresent (failure to communicate the truth nature of some fact) or through non - disclosing at all. Ex. Mr. S
wants to buy a life insurance policy. Yet he never communicate the fact that he work as a life saver brigade of the
municipality. This has something to do for the insurer. Or he may inform the insurer as he is a teacher. In both
cases he breached fiducially duties. The same applies to insurers. ABC Insurers Co failed to communicate to
someone who purchase fire insurance against his warehouse that the policy can extend to the items which actually
belongs to third party be stored at the warehouse.
Insurable Interest: - Insurance protect the chance of economic loss. And such a loss must affect the
estate of a person. Hence, one has to show and make sure that he will sustain an economic loss
unless a certain risk insured. Insurable interest refers to one economic interest as to the safety and
wellbeing of the subject of insurance. What matter most in determination of insurable interest is a
person’s monetary or economic interest over a particular person or thing. Ex. X cannot insure Y’s
house. Yet, X may insure Y’s house if he has it as a mortgage. Here X has an interest to protect and
he may insure the house. Ex. Mr. Z cannot insure the life of a stranger but he can insure the life of
himself and of person whose life he has a pecuniary interest.
@ExitexamworkAAU
62
Jion us telegram@ExitexamworkAAU

63. Indemnity:- indemnity refers to making good or commensuration something economically
lost. The principle of indemnity in insurance stand with the very principle that entails the
damage due by the insured declared compensable shall be equal to the damage caused to
the insured by the risk giving rise to the liability. Of course this is not the case in life
insurance for obvious reason. Yet, you could go and replace potential financial loss of the
beneficiaries. In this principle, the insured should recover only the actual amount of loss
caused by such peril.
Subrogation (substitution): - Subrogation is a form of substitution. The insurer becomes
entitled to the remnants of the property insured once the insurer indemnified the policy
–holder. This principle only applies to Non-Life Insurances. It has been established earlier
that an insured cannot be compensated beyond the extent of loss he has already suffered.
Then, the assurer can exercise the right avail to the insured once the insured. In such a
case the insurer exercise the right available to the assured. Hence the right to subrogation
is limited to the extent of right that the assured had. Ex. Mr. L buy motor insurance policy
from an insurer name K. And if the insured involved in the car accident and sustained 100%
damage, then, if the insurer can take the salvage of the car once it satisfies the
compensation. Once, the insurer K satisfied claim to the insured, it can substitute and take
a legal action seeking a relief for the loss against the person who caused such loss.
@ExitexamworkAAU
63
Jion us telegram@ExitexamworkAAU

64. Contribution: -
The principle of contribution works in case when there is a double insurance situation, double
insurance shall present when the same risk and same subject matter is insured with more than one
insurer, then we say there is double insurance. If a property is insured by several insurers against the
same risk, the insurers must share the burden of payment in proportion to the amount assured by
each. If any of the insurers pays the whole loss, he is entitled to contribution from the other insurers.
Ex. A house is insured against fire for ETB 20,000 with X and for ETB 10,000 with Y. A fire occurs and
the damage is estimated at ETB 6,000. X and Y share the loss in the proportion of ETB 20,000 :
10,000 i.e. 2: 1. X will pay ETB 4,000 and Y will pay 2,000. The policy holder can sue both X and Y
together or any one of them. Suppose that he sues X and recovers from him ETB 6,000. X can claim
contribution from Y to the extent of ETB 2,000. The principle of contribution can apply to property
insurance. In such a case the person is free to insure his property with any number of insurers as he
please. But in case loss occur he will not be allowed to recover claims against all insurers together.
Because here the principle of indemnity prevails which entails that no one can get compensated
beyond his loss. Hence, the insured is not allowed to make a profit out of his loss in whatever form.
But, the principle of contribution shall not going to apply in case of life insurance. There may be a
number of insurance policies for any amounts. A man is entitled to place any value to his life and
therefore upon death, all the policies are payable whatever the total amount may be. N.B. This
principle only applies to Non-Life Insurance.
@ExitexamworkAAU
64
Jion us telegram@ExitexamworkAAU

65. Risk Must Attached:
-
The very reason why persons buy insurance is to get compensated against financial risk of
loss. Hence, the risk that could cause the loss should potentially get identified by parties to
insurance contract. Therefore, the parties to the contract of insurance should markup fist the
type of peril that may lead insured to sustain economic loss. The insured may not be entitled
for the claim by the mere fact that he is a holder of the policy. The identity of the loss and
the type of peril causes such a risk must notified at the time when the insured claims for the
recovery of money against certain loss. The attachment of risk can identify the manner how
parties chose pure risk to speculative one. Thus, risk should always be determined by the
parties to insurance contract. Ex. If Mr. P insures his generator against fire, then he cannot
allege for compensation in case such a property is robbed by burglars; unless such a loss is
covered by the policy as a general risk.
Mitigation of Loss: - In the case of accident and mischance, it is duty of the policy – holder
to take steps necessary for reducing the loss as much as possible. For instance, when fire
occurs the policy holder must safeguard the remaining property.
@ExitexamworkAAU
65
Jion us telegram@ExitexamworkAAU

66. Types of Insurance
The three most important insurance are Life, Property (Fire) and Marine insurances. In addition to these three,
there are various miscellaneous types of insurance, ex. accident, motor vehicles, aviation, burglary etc. 1.Life Insurance
This is a type of insurance policy whereby the liability of the insurer to pay sum assured arises upon death of
person concerned or the attainment of certain age. The event upon which the money is payable is certain to occur
but the date of occurrence is uncertain. In other forms of insurance the peril insured against may or may not occur.
Life insurance is a contingent contract. The full amount mentioned in the policy must be paid on the happening of
the contingency stipulated on the policy. Other forms of insurances are contract of indemnity whereby the insurer is
only liable to make good the actual loss suffered. In life insurance insurable interest must attached or presented at
the time contract of insurance entered into. In other forms of insurance insurable interest must present at the time
the loss occurs. Life insurance is long term contract as compared to others which lasts for year or so. Only physical
persons can enter into life insurance. Life insurance may be arranged as whole life policy whereby a lump sum of
money is payable upon the death of the assured to his heirs or nominees. There is also a type of life insurance
policy called endowment policy thereby a lump sum of money is payable to the assured upon the attainment of
certain age , or in the event of his dying earlier, to his heirs or nominees upon death. If such payment is payable to
assured in monthly or annual installment basis then such is called annuities.
Life Insurance Endowment and whole life policy
1. Marine Insurance Cargo, Vessel, Personnel (Personnel &I)
2. Fire and other Insurance: -
Which one of the following principle is not a major principle applicable to all types of insurance policies?
a. Doctrine of Substitution
@ExitexamworkAAU
66
Jion us telegram@ExitexamworkAAU

67. 2. Marine Insurance
Maine insurance is the oldest type of insurance policy. It is usually being considered in case
of international trade. This type of insurance covers the risk arising from marine adventure.
Here the insurer and insured agrees whereby the former undertakes to indemnify the
assured, in the manner and to the extent thereby agreed, against marine losses, or losses
incidental to marine adventure. It such policy covers comprehensive liability insurance for
the property damaged and bodily injury of the crew then it is named protection and
indemnity insurance (P&I). If the cover assures the cargo against damage and lost, then it
protect the interest of the shipper of the goods. If cover only extends to the physical
damage of the ship both at the course of building as well as in the collision with other ship
taking expedition itself then it is called coverage to vessel. The ship owner may be
indemnified under the type of marine insurance called freight for non - delivery of goods
arising out of loss of earning if the goods lost or damaged or not delivered.
@ExitexamworkAAU
67
Jion us telegram@ExitexamworkAAU

68. 3. Fire and other Insurance
Fire insurance is always taken up for damage of properties occurs as a result of fire blaze.
Fire is always there when there is burn. In other words no fire can exist without ignition
(explosion). Fire may produce light and heat but either of them alone is not a fire. Lightning
is not a fire. If such lightning ignites something, the damage may be covered by a fire
insurance. Then the insured may claim for the damage because the property are damage
because of the fire. Fire insurance is called specific where the liability of the insurer is
limited to specified property and sum which is less that the value of the property. Remember
here that you are entitled for claim you manage to defend the causality that the fire was
unintentional. If the fire is intentional then you will not get any compensation because it
constitute a crime called arson. Fire insurance may be made on agreed value which is
called valued policy. Thereby, the insured cannot claim beyond what is valued at the time of
when the policy written. The opposite is called unvalued policy. Here the value of the
property is not fixed on what is agreed on the particular date by the parties, but on the
market value assessed at the time of loss. There may be a fire insurance type which is
called comprehensive policy. Thereby the insured may be entitled to claim for loss due on
variety of risk in properties..
@ExitexamworkAAU
68
Jion us telegram@ExitexamworkAAU

69. For instance a fire policy with burglary, third party losses, or loss of profit. Such policy may
either made for replacement or reinstate the property damaged. There is other types of
insurance called burglary thereby goods may be insured against theft or robbery. The policy
holder is required to take all precautious measures against loss by theft or robbery. The
other type of insurance is called motor car insurance. Here the policy may cover three
different types of risks or the combinations all three (comprehensive insurance). Thus, the
damage on car and carriage, damage payable by the owner of the vehicle as a result of
accident as well as the injuries to or death of any passenger by accident. Insurance policy
for workmen is also the other type. This type of policy covers risk of injuries or death of
employees according to Labor law.
An insurance policy may cover different types of risks simultaneously. Thus there may be a
policy combining fire, burglary, third party losses, etc.


@ExitexamworkAAU
69
Jion us telegram@ExitexamworkAAU

70. Question For Revision
@ExitexamworkAAU
70
Jion us telegram@ExitexamworkAAU

71. ______ 1.Which one of the following could validly establish distinction between sale and agreement to sale.
A.Transfer of ownership.
B.Shifting risk
C.Remedial measures.
D.The nature of the contract.
E.C & D
F.All of the above
______ 2. The principal shall be jointly liable with agent for apparent agency, except;
A.Where he inform third party the existence of agency but failed to inform him of the partial or total
revocation;
B.Where he fail to return the power of attorney;
C.Where he cause in any other manner, that a third party to believe that the person whom they are dealing was
authorized to act on his behalf.
D.None
E.All of the above
_____3. Which of the following statement in respect to the law of contract is accurate?
A.A contract is a type of agreement
B.The term ‘contract’ and ‘agreement’ mean the same thing.
C.Contract can exist irrespective of agreement
D.Not all contract are agreement.
E.B & D
@ExitexamworkAAU
71
Jion us telegram@ExitexamworkAAU

72. ______ 4. Three intimate individuals wish to set up in business together. They want minimal formation formalities and
are each prepared to accept all of the responsibilities and liabilities that the business might incur. Which of these
business types is likely to be the most appropriate?
A.Sole trader
B.Partnership
C.Private limited company
D.Share Company
E.All of the above
______ 5. All can give rise to the relation of Agency except;
A.When the agent is subject of his principal’s control.
B.when the agent works on behalf and for the interests of his principal.
C.when there is an agreement run between the agent and principal
D.when there is remuneration to the principal
E.A & D
______6. Which of the following pedigrees of law distinguish positive law school from other school of law thought. A.
it is passed by correct authority
B. the correct authority should follow all established law making procedures.
C. A &B
D. it incorporate moral ingredient
E. All of the above
@ExitexamworkAAU
72
Jion us telegram@ExitexamworkAAU

73. ________7. A Private Limited Company is one which, by its Articles of Association;
A.Can permit any invitation to the public to subscribe for any share in.
B.Allow any number of members.
C.Restrict the right of the members to transfer their shares, if any.
D.Can sign for prospectus
E.All of the above
______ 8.The following statements holds false except;
A.A. Viability to live is the only legal requirements for commencement of personality.
B.According to Ethiopian law of person, birth is the sole means of attaining personality
C.Both juridical and physical persons may establish business through sole proprietorship.
D.A child merely conceived shall be considered born whenever his biological interest so demands,
he is born viable and alive.
E.E. None
______9. The consent of parties to a contract is said to be defective when:
A.Two or more persons agree upon same thing in the same sense.
B.Obligations should relate to proprietary nature.
C.It is the result of coercion or undue influence, fraud, misrepresentation or mistake.
D.All of the above
E.All except C

@ExitexamworkAAU
73
Jion us telegram@ExitexamworkAAU

74. ______ 9. Mr. ‘A’ rent his apartment to Mr. ‘M’ with monthly contract price of Birr 1000. Mr. M then used
the same apartment for illegal body organ transplantation operating room. Assume that Mr. A aware of Mr.
M’s act, what would be the consequence of the rent contract?
a.It becomes invalidated on the ground of illegality of object
b.It becomes invalidated on the ground of Fraud
c.It becomes invalidated on the ground of Duress
d.The contract considered valid but Mr. ‘A‘will have the option to terminate the contract.
e.None.
 
@ExitexamworkAAU
74
Jion us telegram@ExitexamworkAAU