Lecture Notes on: the Law of Contract

Wollega Univeristy

College of Engineering and Technology

Construction Technology & Management( PG)

Contract & Buisness Law Course

Lecture Notes
On

Introduction to the Law of Contract

Delivered by:

Alemu Mosisa (Assistant Professor)

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 Lecture Notes on: the Law of Contract

1. Background
2. Definition & Types of Contract
3. Formation of Contract
 Capacity of Persons
 Consent of Persons
 Object of Contract
 Form of Contract
4. Effects of Contract
 Interpretation of Contract
 Performance of Contract
 Variation of Contract
 Non-performance of Contract
5. Extinction of Contractual Obligations
6. Proof of Contract

1. Background
 Generally, a contract is an agreement or willful promise enforceable at law.
 However, not all agreements or promises are contracts. Some may lack enforceability at law.
 A construction contract is a product of an agreement between the employer & the contractor
& it is enforceable at law.
 “Enforceable at law” means that if the agreement reached between the employer & the
contractor breached (deviations occur from the promises) by one of the parties, the aggrieved
party, either the employer or the contractor, may bring a legal action against the other to
demand the enforcement of its rights with the support of law.
 In this part of the Course, we will try to legally define the very concept of Contract, the legal
elements or ingredients to be fulfilled to constitute contract, the formation & variation of
contract & extinction of obligation, the express & implied terms of contract, the very
principles of interpretation of contract, the legal effects & proof of contracts.

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 The general Law of Contract is governed under the Civil Code from Article 1675-Article
2026.
 Except otherwise provided by the provisions of the Special Contracts, the provisions of the
general Law of Contract shall apply.
 The Special Contracts are provided under;-
 the Civil Code;
 the Commercial Code;
 the Maritime Code; and
 Other special applicable laws;
 Under the Civil Code
 The following are illustrative of Special Contracts provided under the Civil Code:
 Contract of Sales ( Article 2266-Article 2407);
 Contract of Donation ( Article 2427-Article 2470);
 Contract of Loan ( Article 2471-Article2489);
 Hiring Sale (Article 2412-Article 2415); NB: This is relevant in case of hire
purchase agreements with respect to construction equipment & construction
machinery.
 Contract of Supplies (Article 2416-Article 2426); NB: This is relevant for the
supply of Goods.
 Contracts for the Performance of Services:
• Contract for Work & Labour (Article 2610-Article2631); NB: This is
relevant for Construction Services.
• Hiring of Intellectual Work (Article 2632-Article 2638); NB: This is
relevant for architectural, consulting engineering services & other
professional services.
• Contract of Work & Labour relating to Immovable ( Article 3019-Article
3040) ( NB: This has specific relevance with respect to Building Contracts);
• Please, consider these types of contracts with that of the provisions of the
Administrative Contract below.
 Contracts for the Custody, Use or Possession of Chattels ( Article
2698Article2874);
 Contracts Relating to Immovable ( Article 2875-Article 3130);
 Administrative Contracts ( Article 3131-Article 3306); of the Civil Code; NB:
Consider also the compulsory application of the provisions of the Law of

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Administrative Contract in case of Public Procurement as per the Standard

Conditions of Contract developed by the Public Procurement Agency(PPA) on the
basis of its power provided under Proc. No. 649/2009.
• Concession of Public Services; (Article 3207-Article 3243);
• Contract of Public Works (Article 3244-3296);
• Contract of Supplies ( Article 3297- Article 3306)
 Contract with respect to Compromise (Article 3307-Article 3324); (NB: This is
important in case of direct or assisted negotiation.)
 Contract with respect to Arbitral Submission (Article 3325-Article 3346); (NB:
This is important in case of resolution of construction disputes by way of
arbitration.)
 Under the Commercial Code
 The following are special contracts provided under the Commercial Code.
 Partnership Agreement (Article 211 et seq.);
 Contract of Carriage (Article 561-Article 653);
• NB: This is relevant for the transportation of Goods: by land; by air;
Carriage of Goods by sea is governed by the Maritime Code.
 Contract of Insurance ( Article 654-Article 712);
 Contracts with respect to Banking Services ( Article 896-Article 967)
 Under the Maritime Code
 The following are special contracts provided under the Maritime Code.
 Contract of Affreghtment (Article 133-Article 146) NB: It is classified in to:-
• Voyage Charter; and
• Time Charter;
 Contract of Carriage supported by Bill of Lading ( Article 180-Article 209;
 Contract with respect to Maritime Insurance ( Article 288-Article 356);
2. Definition & Type of Contracts
Definition of Contract
 According to Article 1675 of the Civil Code: A contract is an agreement whereby two or
more persons as between themselves create, vary or extinguish obligations of a proprietary
nature.
 The definition contains the following elements.
 These are:
 That the contract is an agreement;

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 The agreement is to be made between two or more persons;

 That the agreement is binding between such two or more persons;
 The agreement is to create, vary & extinguish obligations;
 The agreement is to create obligations
 That the nature of obligations is proprietary;
 The construction contract clearly fulfils all the elements given to the definition of contract.
 The Form of Agreement, in the construction contract, clearly presents the Agreement reached
between the employer & the contractor.
 In principle, contracting with oneself is impossible. Is it possible by way of exception, to
contract with oneself? If yes, how? If not, why not?
 The construction contract, in principle, is only binding between the employer & the
contractor.
 This concept is related to the doctrine of the privity of contract.
 Privity of contract means that the contract is binding only the parties who have made it.
 The main contract is only applies between the employer & the main contractor. It does not
apply to sub-contractors or to Engineers, for example.
 There are some exceptions to this rule. Third parties may come to the original contract. For
example, by way of:-
 Succession;
 Assignment;
 Subrogation; and
 Other grounds;
 The construction contract reached between the original employer & the original contractor
could be binding to the successor of the employer or the contractor.
 Assignment of rights may bring third parties to the contract. (NB: Please, see Sub-clause
1.1.2.2 & 1.1.2.3 of Harmonized FIDIC) as to the definition of “Employer” & “Contractor”,
respectively, legal successors of the Employer or the Contractor may become party to the
construction contract.)
 The construction contract obviously creates obligations between the employer & the
contractor.
 Variations may be unavoidable in construction contract. This has been also accommodated
in the definition of contract. The term “variation” has to be understood very cautiously.

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 The employer & the contractor may also agree to terminate their relationship & therewith
liberate themselves from the previously created obligations. It means that the parties to the
construction contract may extinguish their obligation through a contract/ agreement.
 A construction contract creates obligations on the employer & the contractor. For example,
the contractor assumes a performance obligation, whereas the employer assumes a payment
obligation.
 The nature of obligation created by a construction contract is that of proprietary or
patrimonial or financial in nature. It does not have a purpose to create status.

 Types of Contract
 Contracts may be classified based on certain criterion.
 For example, in terms of:-

• Reciprocity of rights & obligations;

• Time parameter for the performance of the assumed respective obligations;
• Form requirement;
• The presence of freedom of negotiation or not;
• Obligation of result or diligence; and
• Other criterion;
 The following are some of the types of contract.
 These are:
• Contracts on onerous v. gratuitous title; (reciprocity);
• Commutative v. aleatory contracts; (time)
• Consensual v. solemn contracts; (form)
• contracts of consultation v. contracts of adhesion; (freedom of negotiation);
 Reciprocity
 Based on the criterion of reciprocity, a type of contract could be classified in to:-
• Contract on onerous title; and
• Contract on gratuitous title;
 Contracts on onerous title create reciprocal rights & obligations on both parties to
the contract.
 Construction Contract can be a good example for this.
 The contractor is obliged to execute, complete & remedy any defects in the works,
if any.
 Whereas, the employer is also obliged to pay the contract price to the contractor.

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 Contracts on gratuitous title create a unilateral obligation in the contractual

agreement.
 Under gratuitous type of contract, one party is obliged to the other, whereas the
other party to the contract owes nothing to the other party.
 There are no reciprocal rights and obligations. For example, a donation agreement.
 Time
 By taking time as the classification criterion, contracts may be classified in to:-
• Commutative contracts; and
• Aleatory contracts;
 Commutative contracts are such type of contracts in which the performance of the
contract by both parties to the contract is made at the same time.
 If one gets a service & pays the service fee instantly, it is a commutative type of
contract.
 In commutative type of contract, there is no time gap during the performance of the
contract by both parties to the contract.
 Aleatory contracts are quite to the contrary to the commutative types of contract.
 There is a certain time interval between the performance of the obligation of one
party to contract & the other.
 Insurance contracts & construction contracts may be classified under this type of
contract.
 Under the insurance contract, the premium is paid immediately by the insured,
whereas the obligation of the insurer to pay the indemnity to the insured may not
come in to picture unless the uncertain event or risk happened in future.
 Under the construction contract, the contractor executes first his performance
obligation & the employer pays the contract price long after the works are executed
by the contractor & certified by the engineer.
 Under the types of contract (insurance & construction), performance of obligation
by respective contracting parties is not simultaneous.
 Form
 On the basis of form, contracts may be classified in to:-
• Consensual contracts; or
• Solemn contracts;
 Consensual contracts require no written form, whereas solemn contracts do.

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 The construction contract, especially if it is made with the public body should
necessarily be made in writing.
 In that case it becomes a solemn contract.
 Freedom of Negotiation
 Based on the criterion of freedom of negotiation, the following categories of type
contract are recognized:
• Contract of consultation; and
• Contract of adhesion;
 In case of contract of consultation both contracting parties have full freedom to
negotiate & determine the entire terms of their contract.
 Whereas, in case of contracts of adhesion one party has already prepared the terms
of the contract & the other party has no freedom of negotiation.
 Such party has but the option ether to accept or reject the contract. In this case,
such type of contract is called contracts of adhesion.
 The construction contract, especially in case of public works, is based on general
conditions of contract, special conditions of contract and other numerous contract
documents, which have been already prepared by the public project owner.
 Shall we say that construction contract is a contract of consultation or a contract of
adhesion?
 By whom the contract document is prepared has its own effect in terms of
interpretation of contracts. (See Article 1738 of the Civil Code).
 Diligence v. Result
 The construction contract, for example, is a result type of contract & not of
diligence.
 Most professional services are diligence type of contract.

3. Elements of Contract
 According to Article 1678 ( Elements of Contract) of the Civil Code:
No valid contract shall exist unless

A. The parties are capable of contracting and give their consent sustainable at law.
B. The object of the contract is sufficiently defined and is possible and lawful.
C. The contract is made in the form prescribed by law.
 The following are the fundamental elements of contract.
 Capacity of the contracting parties;

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 Consent of the contracting parties;

 Object of the contract; and
 Form of contract, if any;

 Capacity
 Please, see Article 1678(a) of the Civil Code.
 Capacity means competence to enter in to a legally binding agreement.
 Parties entering in to an agreement or contract shall, therefore, be capable of
contracting.
 Legal capacity is of two types: Personal (Own) capacity; and
Representative(Agent)capacity;
 Capacity of persons is legally presumed unless the contrary is proved.
 Persons could be:- natural (physical) persons; or legal or juridical persons;
 Natural Persons
• Natural or physical persons are human beings.
• Their legal capacity is determined by law.
• The scope of capacity of physical persons is relatively unlimited unless the
contrary is proved.
• Physical persons are the subject of rights & duties from birth to death. See
Article 1 of the Civil Code.  Legal Persons
• Legal persons are of two types in terms of determining their coming in to
being & their legal capacity.
• These are:-
 By legislation; (in case of public bodies/institutions); and
 By registration; (in case of non-public bodies/corporate and/or non-
corporate private entities);
 The existence of public bodies (Ministries, Commissions, Bureaus, Authorities,
Agencies …) & their legal capacity to enter in to contract & bind themselves emanates
from the Civil Code & the special legal instrument (legislation), which establishes that
specific public body.
 The legal capacity of non-public bodies (Plc’s, Share Companies, Corporations…) &
their legal existence comes in to being by registration. The act of registration by
competent public authority confers legal personality & therewith (limited) legal
capacity to enter into contract & bind themselves.

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 The capacity of legal persons is only related with their purpose or objective, for which
they are created.
 The following may not have (legal) capacity to enter in to contract & bind themselves.
 These are:-
 Minors (under the age of 18);
 Companies adjudged or declared bankrupt;
 Judicially interdicted persons;
 Legally interdicted persons;
 Persons, whose civil rights are suspended by the judgment of the court;
 Non-nationals, unless permitted by law or special prerogative;
 Non-authorized Agents;
 Agents, whose Power of Attorney has been revoked;
 Agents , the Scope of their Power of Attorney does not cover the intended
transaction(ex. Tendering or Negotiation or Contract Signing, …); and  Others;
 Natural persons or legal persons may enter in to contract:
 Directly by themselves (in their own capacity): or
 Through other persons called agents;
 The power of agents (i.e. their representative capacity) should always be checked, with respect
to construction project, at:
 The tendering stage;
 The negotiation stage;
 The contract signing stage; and
 The Contract performance stage;
 Sometimes also during dispute resolution process/phase;
 The Power of Attorney creates a derivative legal capacity for agents.
 Agents, thus, acquire legal power, though not original, to participate in construction tender,
to negotiate, and/or to sign a construction contract, in the name & on behalf of the named
principal and to bind the principal thereby.
 A contract concluded by the person not capable under the law may be invalidated at the
request of such incapable person, who is party to the contract. See Art. 1808(1).

 Consent
 Please, see Article 1678 (a) and Article 1679- Article 1710 of the Civil Code)
 Consent is a declared will of the individual to enter in to contract.

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 It is the willingness of the parties to enter in to a legally binding relation. 

Consent of the intended contracting parties decomposes in to :-
• Offer; and
• Acceptance;
 Offer
 Offer is defined as a proposal expressing the declared willingness of the offeror to enter
in to an agreement, if the offer is accepted.
 Offer is a legal process which is a declaration of willingness or intent to be bound by
specific terms set out.
 Offer may be made:- Orally; In writing; By sign; By conduct; By specially stipulated
manner for acceptance;
 In case of (public) construction contract, offer shall be made in writing.
 Characteristics of Offer
 The following are characteristics of a valid offer.
 These are that the offer should be:-
• Certain;
• Communicated;
• Unconditional;
• Distinguished from invitation to treat;
 Certainty
 The terms of a contractual offer must be certain or capable of being made certain.
 Unless the details of the bargain are certain, the parties could not be expected to
reach any real agreement.
 Communicability
 The tender is an offer on the part of the bidder contractor.
 The offer, i.e. the tender must be communicated to the offeree, i.e. the prospective
employer.
 Unless the bid/tender prepared by the bidder (prospective contractor)
communicated to the (offeree) on or within the specified time in the instruction to
bidders, one can not say that there is a bid or tender.
 Unconditionality
 If the offer is accepted, it may go to the creation of an agreement.
 For the offer to be valid & acceptable, it should not, thus, be unconditional.
 Unconditional offer is not clear, thus not acceptable.

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 Not being Invitation to Treat

 The following are not offers but invitation to treat:
• Display of goods;
• Advertisement;
• Tender;
 Tender
• Invitation for bids or invitation to tender prepared by the employer or the
project are not offers.
• They are invitation to treat.
• Bidders are making offers, for ex. in terms of o submitting filled & signed
Form of Tender; o priced BOQ;
o alternative proposals, if allowed;

The employer is within his right to accept or reject such offers, however;

 Termination of Offer
 The following could be the way by which the offer could be terminated.
 These are:-
• By Death; -of either party before acceptance of the offer;
• By Counter offer; -of the offeree;
• Revocation; -by the offeror, within the time limit;
• Withdrawal; -by the offeror; within the time limit;
• By lapse of Time; -on part of the offeree, i.e. accepting the offer after the
prescribed time has elapsed;
• By failure to accept in the stipulated manner;- by the offeree, if a specific
mode of acceptance was prescribed in the offer;
• By silence of the offeree; -silence is not acceptance, in principle;
• By Liquidation;- if the offeror construction company has been liquidated
before the offer accepted by the employer;
• By Insolvency;-in case the construction company declared by the court
insolvent, before the offer has been accepted; If the offer were accepted
& contract concluded, that contract is going to be terminated by the
employer on the ground of bankruptcy of the contractor;
• By being adjudged bankrupt;-by the court, before the offer has been
accepted; If the offer were accepted & contract concluded, that contract

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is going to be terminated by the employer on the ground of bankruptcy

of the contractor;
 Acceptance
 Acceptance is a declaration of will to enter in to a legally binding contract.
 By acceptance, a contract shall be completed, where the offeree accepts the offer
without any reservation.
 Forms of Acceptance
 The following could be forms of acceptance.
 These are:- Orally; In writing; By sign; By conduct; As specially stipulated by the
offeror;
 In the construction contract, especially for public works, acceptance in writing is the most
common & legally imperative practice.
 The Letter of Acceptance is a clear example to this.
 Characteristics of Acceptance
 Acceptance could be conditional or unconditional.
 Conditional acceptance rejects the original offer made by the bidder (offeror) &
creates a counter offer or new offer by the project owner.
 Unconditional or unreserved acceptance of an offer by the project owner creates a
Contract Agreement between the bidder & the project owner subject to other
subsequent actions, ex. negotiation.
 In case of Public Projects, approval of the Contract by higher authorities may be
required. In that case, legally, the Contract is not yet concluded until the required
approval is secured.

 Defects in Consent
 Consent given in the process of offer & acceptance should be free from defects in
consent or vices of consent, for the contract to be sustainable & enforceable at law.
 Defects in consent or vices of consent are the following.
 These are:- Mistake; see Art. 1697-Art. 1703 of the Civil Code; Fraud; see Art. 1704-
Art. 1705 of the Civil Code; Duress; see Art. 1706-Art. 1709 of the Civil Code; 
Mistake
• Mistake is defined as a misunderstanding of or erroneous belief about a matter
of fact or a matter of law.
• Mistake is, therefore, divided in to: Mistake of law; and Mistake of fact;

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• Mistake of law could be:-Mistake of the law of the country; or Mistake of

foreign law;
• Mistake of fact could be, common, bilateral or unilateral mistake, and related
to the following factual circumstances:
 Mistake as to the subject matter of the contract;
 Mistake as to the possibility of performance of the contract;
 Unilateral mistake;
 Mistake as to person; in terms of its identity, qualification, and the
fundamental elements of the contract;
The legal sanction or remedy against mistake is invalidation of the contract &
damages. See Art. 1696 & Art. 1703 of the Civil Code, respectively.
 Fraud
• Fraud means a false representation, by means of a statement, conduct made
knowingly or recklessly in order to gain a material advantage.
• Fraud is divided in to:- Decisive fraud; andIncidental fraud;
• Decisive fraud is that without the fraud, the person in error or the person deceived
would not have thought of entering in to the contract.
• Whereas, in case of incidental fraud, the fraud has not determined the person in
error or deceived, who even knowing the truth, would have thought of
contracting, but at less onerous terms.
• Legal sanction or remedy, i.e. invalidation of the contract has been provided for
the decisive fraud. See Art. 1696 cum Art. 1704(1) of the Civil Code.
 Duress
• Duress means a threat of imminent danger, which may be a future, or immediate
danger posted against the contractant himself or his nearest relatives. See Art.
1706 of the Civil Code.
• The legal remedy against duress is invalidation of the contract, which is the result
of duress. See Art. 1696 cum Art. 1706(1).
• Invalidation of contract based on defects in consent is governed under Art. 1808
et seq. of the Civil Code.

 Object
 Please, see Article 1678 (b) cum Article 1711 – Article 1718 of the Civil Code);
 The object of contract is the very obligations of the contracting parties ex, in the construction
contract, the obligations of the employer and of the contractor.

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 The possible objects, i.e. the obligations of the contracting parties, of contract are:- obligation
to do (perform);obligation not to do; or obligation to deliver;
 The obligations of the contracting parties could be divided in to two broad terms:
Promises; and Considerations;

The object of contract (i.e. both promises & considerations) shall be:-Sufficiently defined;
Art. 1678(b) cum Art. 1714; Possible; Art. 1678(b) cum Art. 1715; Lawful; Art.
1678(b) cum Art. 1716(1); Not immoral; Art. 1716(1);
 The object of a construction contract shall be sufficiently defined.
 In the construction contract the whole purpose of all parts of the contract documents (the
BOQ, the Drawing, the Technical Specification, notably, & including the Conditions of
Contract (both General and Special Conditions of Contract), and other documents like filled
forms) is to sufficiently define the object of the construction contract, i.e. the very respective
obligations of the contractor & the employer.
 The contractual obligation of the contractor (i.e. Promises) shall be determined from the
contract documents in terms of:
• What to do: i.e. to construct:- water supply dam & systems; or irrigation dam; or
Hydropower dam; or other hydraulic structures; or road; or building; or other type
of structures;
• In terms of its:- scope; quality; cost; time; safety; and other aspects of its promises.
 The Payment, obligation to do, or (Considerations) and other contractual rewarding
obligations of the employer shall also be sufficiently defined in terms of:
• Payment obligation: extent of contract price; types of payment; timing for payment;
conditions of payment; other related issues;
• and other obligations in terms of other benefits, exchanges, & rewards;
 These obligations are the very promises & considerations of the contractor & the employer
in the construction contract, respectively.
 Unless the principle of implied terms or the rule of interpretation of contract supports to
resolve the issue of the object of contract, it is difficult to define the object of contract by any
body else except by the contracting parties themselves.
 The object of contract, even though sufficiently defined, it has to be possible or capable of
being performed.
 Impossibility of performance of ones obligation may relate to physical or legal impossibility.
 Impossibility of performance must not be confused with difficulty of performance

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 The object of contract shall be lawful. Contract agreements can not serve to achieve illegal
objectives.
 There shall not be any contract agreement on legally prohibited matters.
Contracts shall not also go contrary to accepted moral values (as to the principle of right or
wrong) of the society.
 If the contract found to be unlawful or immoral, the legal remedy available is invalidation of
the contract at the request of any contracting party or interested third party. See Art. 1808(2)
of the Civil Code.

 Form
 Please, see Article 1678 (c) cum Article 1719 – Article 1730 of the Civil Code.
 Form may mean types of contract.
 Form may also mean the making of the contract orally or in writing.
 Should the contract is to be made in certain prescribed form, it means that contract should
be made in writing.
 In this case, form is related with the validity & proof of the contract itself.
 By form, under these circumstances, we mean the making of the contract in writing, if the
law imperatively prescribes so or if the parties voluntarily wish to do so.
 In the absence of the law requiring the contract to be in writing, (see Art. 1719(1), the parties
are free to make their contract as they wish. They can make it orally or in writing. See Art.
1719 (2).
 Should the parties wish to conclude a type of contract which should be made in writing, any
preliminary contract in respect thereof, shall also be made in writing? See Art. 1721.
 This is true in case of a contract of agency, which is a preliminary contract for the basic
contract to be concluded between the agent & the third party.
 Should the parties once choose to make or create their contract in writing; any variation (see
Art. 1722) thereto shall be made in writing.
 Contracts with public (government) body shall be made, legally, in writing. (See Article 1724
of the Civil Code).
 If the contract shall be made in writing, there are two possibilities:
• Preparing fully tailor-made contract to the project at hand; or
• Using standard conditions of contract suitable for the project at hand;
 The first type of contract is called contract of consultation, whereas the second one is called
contract of adhesion.
 In public works, the use of standard conditions of contract is common.

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 Standard conditions of contract could be international or national in origin.

If the contract should be made in writing, the following additional legal formalities have to
be fulfilled, namely:
• There must be a special contract document prepared for that purpose; (ex. Form of
Agreement, which summarizes the whole Agreement & sets out the whole contract
document);
• On that document (including on the whole pages of all the Contract Documents) the
parties to the contract agreement shall put their signature; see Art. 1728;
• In case of body corporate, their corporate seal has to be affixed on all parts or pages
of the contract documents;
• The contract agreement shall be attested, at least, by two witnesses. The witnesses
shall also sign the contract agreement but only on the designated space in the contract
agreement. (Ex. On the last page of the Form of Agreement); see Art. 1729;
 Then, the contract said to be, legally, formed or created.

4. Effects of Contract
 Effects of contract may have two dimensions;
 The time when the contract is considered bound by the contracting parties; and
 The fulfillment or performance of the set of promises prescribed in the contract;
 The first dimension relates to the effectiveness of the contract, whereas the second is related
to the performance of obligations of the contracting parties under the contract.
 Effectiveness of the Contract (Time Dimension)
 This may be expressed in the following three ways: Contract is effective and thus is
binding on the contracting parties from the moment of the conclusion of the contract;
 Contract can be considered effective after some days are passed from the conclusion
of the contract; and
 Contract can be considered effective after the performance of some actions by the
contracting parties; ex. Making advance payment a condition precedent for the
effectiveness of the contract. Securing approval of the contract by higher authorities;
Other pre-conditions, if any; This has a time dimension.  Performance of the
Contract (Discharge Dimension)
 The following discussions are focused on the real performance of the contract as
agreed.

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 This concept is related to the Latin maxim: pacta sunt servanda- one who enters into
a contract is legally bound or agreement to be kept.
 Effects of contract may bring:-Contractual effects; and /or Legal effects;
 Contractual Effects
 The discussion refers the contractual provisions (Sub-clauses) of the MDB-FIDIC
Harmonized Edition Contract Conditions & the Civil Code.
 According to Article 1731 of the Civil Code:
• A contract lawfully formed shall be binding on the parties as though they
were law;
• The contents of the contract shall be determined by the parties subject to the
mandatory provisions of law;
 The lawful or valid formation of contract is related with the fulfillment of all the four
elements of contract, namely, capacity, consent, object, and form, if any.
 Validly formed contracts are binding on the contracting parties, as they were law.
 It means that contracts are producing rights, obligations & privileges & therewith
remedial rights to & liabilities against the contracting parties.
 Effects of contract are, in principle, on the contracting parties, for ex. on the employer
& the contractor.
 This principle is called privity of contract or relative effect of contract.
 Third parties, in principle, are not entitled to rights or owe no obligation. (See Article
1731(1) cum Article 1952(1) of the Civil Code.
 Contracts made by contracting parties have no effect on non-contracting parties.
 These non-contracting parties are called, legally, third parties.
• The Construction Contract made by the Employer & the Contractor is not
binding on the Sub-contractor.
• The Sub-contract Contract made by the by the Main Contractor & the Sub-
Contractor is not binding on the Employer
• The Consultancy Agreement made by the by the Employer & the Engineer is
not binding on the Contractor.
• The Construction Contract made by the by the Employer & the Contractor
is not binding on the Engineer.
 By way of exception, third parties may have rights and/or owe obligations in the
contract made by other contracting parties.
 For example in case of:

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• Assignment of benefit or subcontract (under the Harmonised Edition: see

Clause 4.5) & see Article 1952(1) of the Civil Code;
• Assignment of right to the bank or financial institutions : see (under the
Harmonised Edition) Clause 1.7;
• Subrogation by the Insurance institutions; see Article 1971 of the Civil Code;
• Succession:
 by contract & operation of the law(ex. for partnerships…); See
(under the Harmonised Edition) Clause 1.1.2.2 for the Employer &
Clause 1.1.2.3 for the Contractor; or
 by operation of the law or by will (for natural persons);or
 by legislation(for public bodies);
 Major Areas of Effects of Contract
 Effects of contract basically concerned with the following four issues.  These are;-
• Interpretation of Contract; - (Article 1732-Article 1739 of the Civil Code);
• Performance of Contract; -Article 1740-Article 1762 of the Civil Code);
• Variation of Contract; - (Article 1675 & Article 1763-Article 1770 of the Civil
Code);
• Non-performance of Contract; - (Article 1771-Article 1805 of the Civil Code)
 Interpretation of Contract
 Interpretation, generally, means the process of determining the true meaning of a
written document. Interpretation is a judicial process, affected in accordance with a
number of rules & presumptions.
 Conditions of contract, based on the principles of interpretation of contract, are
interpreted, depending on the circumstances:
 Interpretation may be classified in to:- Formal interpretation; and Informal
interpretation;
 Formal interpretation
 Formal interpretation may be conducted; By the court;
 The court which has a competent jurisdiction over the case;
 The role of interpretation has been given to the court on the
constitutional principle called, separation of powers;
 The specific jurisdiction of the court is determined by specific statute
or law to that effect;

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By the arbitral tribunal;

 The formal power of interpretation of contracts of the arbitral
tribunal is based on the agreement of the parties & recognized by
law;
 This is related with the recognition & enforcement of the agreement
to arbitrate & recognition & enforcement of the arbitral award;
 The very source of the power of the arbitral tribunal for the purpose
of interpretation emanates from the agreement of the parties, except
in case of compulsory arbitration.
 See Sub-clause 20.6 of the Harmonized Edition & the applicable law.
 Informal interpretation
 Informal interpretation may be done;
 By the Conditions of Contract itself;
• (See (under the MDB Edition) Sub-Clause 1.1 Definitions; and
• Sub-Clause1.2 Interpretation);
 By the contracting parties themselves. In case of negotiation or other forms of
amicable dispute settlement;
• See also Article 3307-3324 of the Civil Code;-Compromise;
• See also Article 274-280 of the Civil Procedure Code; Compromise;
 By the Engineer;
• by giving Clarification for ambiguities or discrepancies in the Contract
Document;
• (See (under the MDB Edition) Clause 1.5-Priority of Documents);
• by Determination see (under the MDB Harmonized FIDIC Edition)
Clause 3.5 cum Clause 20.1 on the Claims of the Contractor; Clause 2.5
on the Claims of the Employer ; and on any requests of the Contractor & of the
Employer;  By the Adjudicator (DB);
• See under Clause 20.3 of the MDB-FIDIC Harmonized Edition;
Adjudication not yet legally recognized in Ethiopia.
• see also Article 25-26 of the PPA Conditions of Contract on
Adjudication;

 Performance of Contract
 Performance of Contract may mean the carrying out or discharge of the obligation
under taken by the contracting parties under the contract.

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 That is, respectively, from the perspective, for example, of the Contractor & of the
Employer, under the construction contract i.e.
• promise dimension; and
• consideration dimension.
 The effect of contract is fulfilled by performance of the very contractual obligations
of the contracting parties.
 It means that :
 the Contractor has executed the works within the time for completion, within the
cost agreed, as per the quality specified…;and
 the Employer has paid fully the Contract price, and any other sums agreed under
or implied from the contract, to the Contractor;
 Both parties have discharged their obligations, as agreed. They have given full effect
to the contract.

 Variation of Contract
 Variation of Contract could be done:-
• By the contracting parties, contractual variation, (as a rule); or
• By the Court, judicial variation, (as an exception);
 Variation of Contract by the Parties
 The contracting parties, in principle, are free to create & vary their contractual
agreement. (See Article 1675 of the Civil Code).
 Variation of contract & its effect are regulated under the Conditions of Contract.
See Sub-clause 13-Variations & Adjustments; Harmonized Edition;
 Variation of contract, under the construction contract, may result from:-
• Requirement change by the employer,
• Design change by the engineer;
• Proposal by the contractor;
 By variation, parties are giving a modified effect to their contract & perform the
Contract, as varied.
 Judicial Variation of Contract (Article 1763-Article 1770 of the Civil Code)
 Judicial variation or variation of contracts by the court is not allowed, in principle.
See Article 1763 of the Civil Code.
 Contracts may get their effect through judicial variation, by way of exception,
however. See Article 1763 of the Civil Code.

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 Judicial variation of Contracts, as opposed to variation of Contract by the parties, is

regulated by the applicable law.
 Under the applicable law, the Ethiopian court may vary the terms of the contract
under the following circumstances.
• Where it is expressly provided by law; see Article 1763;
• Where a special relationship between the contracting parties exists; see
Article 1766;
• Where one of the contracting parties is a state or one of its institutions; see
Article 1767;
• Where it is partially impossible to perform the contract; see Article 1768; 
Let us focus on Article 1767.
 The issue of one of the contracting parties being a state or one of the state institutions
(Article 1767) is related to the concept of Administrative Contract.
 Administrative Contract is defined under Article 3131 of the Civil Code.
 This concept is important in relation to construction contract of public works nature.
 Judicial variation may apply, for ex., in case of Administrative Contracts.
• See Article 1767-Contracts with a Public Administration;
• (NB: Power of the court to vary contracts, in case of
Administrative Contract due to official decision, Bringing the
performance of the contract by the Contractor more onerous or
Impossible);
• See Article 3190-General Measures -1. Affecting Substance of Contract;
• See Article 3191- 2. Making the Performance of the Contract More
Onerous;
• See Article 3192 - Particular Measures -1. Taken by Contracting
Authorities;
• See Article 3193 – 2. Taken by another Authority;
 See also (under the MDB-FIDIC Harmonized Edition)Clause 13.7- Adjustment for
Changes in Legislation;
 See also (under the MBD-FIDIC ) Clause 16.2 (d)- Termination by the Contractor
(Due to
Employer’s conduct adversely affecting the economic balance of the contract);

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 Non-performance of Contract
• Non-performance of contracts means the failure of the contracting party or parties to
carry out the obligations they have undertaken under the contract.
• The effects of contract are sanctioned by applying the provisions of the law or the
agreement of the parties.
• Non-performance involves the following legal concepts.  Notice requirement;
• Notice necessary (Article 1772-Article 1774);
• Notice unnecessary (Article 1775);
 Specific performance; (Article 1776-Article 1783)
 Actual performance;
 Performing the very contract or obligation by the contractor itself;
 This requires court decision;
 Important considerations for specific performance decision by the court are:
special interests of the creditor & preserving the personal liberty of the
debtor;
• Substitutionary performance;
 By the employer himself;
 by surety, in case of calling a Performance Bond
by the employer;  by another contractor;  Cancellation of
contract;
• Cancellation by court (Article 1784-1785);
• Cancellation by the contracting party (Article 1786-1790);  Damages;
• Liability for damages; see (Article 1791-1798);
• Quantum of damages: see Article 1799-1805);
 Damages may be requested due to;
• Non-performance of the contract; and Invalidation of the contract.
 No payment of damages in case of force majeure.
 Non-performance may arise in case of construction contract on the following instances.
• Total non-performance;
• Partial non-performance;
• Defective performance;
• Delayed performance; and
• Delayed payment and/or non-payment;

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 Types of damage could be immediate / direct loss or indirect loss of gain. The first one is called
actual damage; whereas the latter consequential damage.
 Damages may also be further categorized in to liquidated or un-liquidated/general damages.
 Liquidated damages are a pre-agreed & determined sum in the contract. It is enforceable in
case of delay in performance. No need of proof as to the sustaining of damage by the employer,
ex. in case of the construction contract.
 General damages require proof of the occurrence of the damage, the cause & the extent
thereof.
 Interest is paid, by way of damages, in case of money debts. See Article 1803 ff of the Civil
Code.
 Invalidation of contract may arise in case of failure to fulfill the elements for the valid
formation of contract. See Article 1808 ff of the Civil Code;
 In case of non-performance of contract, the creditor may or may not oblige, under the
contract & the law, to give or not to give notice. (Notice Requirement)
 The creditor shall have the following alternative remedies;
• Specific/forced performance or substitutionary performance;
• Cancellation of the contract;
• Damages;
 Non-performance of contract may reveal itself in construction contracts in the following
forms of deviations.
 In late completion of the works (time deviation i.e. delay);
 In defective performance of the works; (quality deviations);
 Non-performance of the works; (by way of abandonment or otherwise);
 Partial performance of the works;
 In non-performing of the payment & other obligation (by the Employer);
 Legal Effects
 Construction Contracts shall also bring legal effects.
 Effects of contract are peculiar, relative or specific to the contracting parties.
 Whereas, legal effects of contract are general effects as a matter of public policy on
any contracting parties & in all relevant types of contractual arrangement.
 See the detail consideration of the subject under the Course title “Legal
Regulations”.

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5. Extinction of Obligations
 See the definition given to Contract under Article 1675 of the Civil Code, “… to create, vary
& extinguish…”
 The obligations of the contracting parties may come to an end on the following grounds.
 These are:-
• By performance of the contract; see Article 1808 & Article 1740-Article 1762 of the
Civil Code;
• By invalidation of the contract; see Article 1807 & Article 1808-Article 1818 of the
Civil Code;
• By cancellation of the contract; see Article 1807 & Article 1808-Article 1818 of the
Civil Code;
• By termination of the contract; see Article 1807 & Article 1808-Article 1818 of the
Civil Code;
• By remission of debt; see Article 1825 of the Civil Code;
• By novation; see Article 1807 & Article 1826-Article 1830 of the Civil Code;
• By set-off; see Article1807 & Article 1831-Article 1841 of the Civil Code;
• By merger; see Article1807 & Article 1842-Article 1844 of the Civil Code;
• By limitation of action; see Article 1807 & Article 1845-Article 1856 of the Civil Code;
 By performance of the contract
• This is the case where the Contractor & the Employer under the Construction
Contract perform all of their obligations under the said Contract.
• The Contractor has executed the Works under the Contract within the time, cost,
quality & scope…, as agreed or as varied.
• The Employer has discharged all of its obligations including payment as agreed or as
varied.
 By invalidation of the contract
• Invalidation of contract may result with respect to void & voidable contracts.
• A contract is voidable due to vices of or defects in consent & incapacity. That is the
contract was concluded as a result of mistake, duress, or fraud.
• A contract is void (ab initio) because of the object of the contract being unlawful,
immoral or lacks the prescribed form.
• The effects of invalidation of contract is that the parties shall, as far as possible, be
reinstated in the position which would have existed, had the (invalidated) contract not
been made.
 By cancellation

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• Cancellation of contract may result from non performance of contract.

• The contract may be cancelled by the party to the contract or by the court.
• Cancellation of contract may (see Article 1772) or may not require (see Article 1775)
prior written notice to be give to the defaulting party.
• The effect of cancellation is the same as the invalidation of contract.
 By termination
• A contract could be terminated by both parties to the contract (jointly) or by one of
them (unilaterally).
• Termination of contract shall be accompanied by prior written notice.
• The extent of the period of notice may be fixed in the contract or by custom.
• The effect of termination of contract results the non performance of the contract by
the parties.
• Termination of contract shall have no retrospective effect. All contractual acts done
before termination remain intact with their effects.
• Termination of contract liberates the parties from the future performance of the
contract. This effect is contrary to the invalidation and cancellation of contract. The
latter have retrospective effect.
 By remission of debt
• Remission of debt results where the creditor releases the debtor from its obligation.
• The remission may not exist where the debtor immediately refuses the remission of
the said debt.
 By novation
• Novation occurs where the parties agree to substitute therefore a new obligation
which differs from the original one on account of its object or nature.
• The original obligation shall clearly be extinguished otherwise there is no novation.
 By set-off
• Set-off occurs where two persons owe debt to one another.
• Pre-conditions for the existence of set-off:
 the obligations:-shall be in money, or in fungible things;
 both debts are liquidated (capable of ascertainment); and
 Due or matured;
• All obligations may not be subject to set-off (obligation to the State, ex tax, wages to
the employees...);
• Effect of set-off is that the debts shall extinguish each other as from the day when they
both exist & to the extent of the amount of the lesser debt.  By merger

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• Merger shall occur & the obligation shall extinguish where the positions of creditor
& debtor are merged in the same person.
• Merger shall have no effect on third parties & it may survive.

 By limitation of action
• This is the effect of time on rights, unless exercised within the legally allowable time.
The creditor may lose his rights unless he demands same within a given time.
• The extent of time within which an action could be brought against the debtor is ten
years in contract, subject to special laws.
• The action may relate to the performance of a contract, non-performance of a
contract & action for the invalidation of contract.
• The effect of not bringing an action by the creditor against the debtor is liberating the
debtor from the said obligation.
• The creditor’s action is limited by operation of time.
• Period of limitation may be interrupted by certain acts of the creditor, by admission
of the debt by the debtor, by bringing an action against the debtor.
• The period of limitation should be pleaded during the court action by the defendant
or the debtor & can not be raised by the court itself. (see Article 1856(2) of the Civil
Code and also Article 244(2)(f) of the Civil Procedure Code);
• The Construction Contract is subject to the ten years period of limitation.

6. Proof of Contract

 See Article 2001-Article 2026; Proof in Relation to Contracts; (of the Civil Code;  Proof of
contract is important in case of construction claims & disputes.
 Proof or evidence is important to prove the existence or non existence of a given fact, which
is either disputed or denied.
 Admitted facts do not need proof.
 Laws do not require proof. A judicial notice has been taken; it should be taken, by all
concerned, by operation of the law. The legal basis for this is Proc. No. 3/1995, which
establishes the Federal Negarit Gazeta;
 All persons, natural & legal, including the legislative, the executive & the judiciary branch of
the government shall all take judicial notice of an enacted & publicized law.
 The form of proof in relation to Construction Contract could be:
 Documentary evidence;

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 Factual witness;
 Expert opinion;
 Project site visit;
 Others, if any;
 Documentary evidence has a wider application in case of Construction Contract.
 It may include the following:
 The Construction Contract itself; 
Records in relation to the:
• Time aspect of the project;
• Cost aspect of the project;
• Quality aspect of the project;
• Safety aspect of the project;
• Payment aspect of the Contract;
• Site & Access thereto;
• other contractual or legal obligations of the Contractor and/or the Employer;
• Variation in the works;
• Outside Records;
• Others, if any;
 The records may appear in diverse forms:
• Correspondences or Exchange of Letters;
• Notices;
• Reports;
• Minutes of Meeting;
• Site Diary;
• Site Instructions;
• Payment Certificates or related documents;
• Executed Standard Forms;
• Others, if any;
 Factual Witness Statements are prepared by those who have a direct factual
knowledge about a given aspect of the project ( ex, time, payment, …)
 Expert Witness Reports are prepared & submitted to court or arbitral tribunal to
show some professional conclusions about the disputed matter.
 Expert Reports are reflections of professional opinion & they are not necessarily
binding on the judge or the arbitrator.

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 The proof is required to be submitted by the one who alleges the existence of a given
fact. This is called a burden of proof.
 The burden of proof has two elements: Burden of production; and Burden of
persuasion.
 The one who submits a proof has also a burden of persuading the
judge or the arbitrator.

 The proof shall fulfill two cumulative ingredients:

• Relevancy of the evidence; and
• Admissibility of the evidence;
 To consider the relevancy & admissibility of a given proof is left to the judge or
arbitrator.
 The hearing, judicial or arbitral, is an important phase of the process at which the
relevancy and/or the admissibility, if admitted its weight, of every proof so
submitted may be challenged, by way of cross-examination.
 The judge or the arbitrator shall decide thereon.

Reference Materials

On

Introduction to the Law of Contract

………………………………………………………………………………………
I. Fundamental Codes
1. the Civil Code;
2. the Commercial Code;
3. the Maritime Code;
II. Zewdu Tefera Worke AAU Lecture note
III. Other Applicable Laws: To be Specified, as per the discussion based on the lecture notes,
especially in relation to legal effects of contract;
IV. Books
Leture note on Law of Contract
By Alemu Mosisa, Assistant Professor

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