LECTURE NOTES ON THE LAW OF CONTRACTS

ON SOLIDARY OBLIGATIONS
Tilahun Teshome (Prof.)

I. INTRODUCTION

a. Scope of solidarity obligations

i. Ks as foundations of debtor/creditor relationship, plurality
of actors. Art. 1675. Expressions such as obligor/obligee
and promisor/promisee are also employed to designate
the same ideas.
ii. In all commutative k’s both parties may be called debtors
and/or creditors depending on the level of performance of
the k at any given time.
iii. In most k’ual dealings, the parties are a single debtor and
creditor. Bilateralism.
iv. But this is not always the case as it is perfectly lawful for
any contract to have several debtors and/or creditors in as
much as it is for a single debtor and/or creditor.
Multilateralism.

b. Terminology
i. Joint and several liability and/or debtors
ii. Solidary obligations and/or obligors
iii. Joint and several promise and/or promisors
iv. Joint and several right and/or creditors
v. Solidary right
vi. Solidary claim
vii. Simple joint obligations
viii. Subscription contracts

c. Principles of solidarity
i. Solidary obligations arise from the existence of several
debtors that are obliged by a single obligation/promise.
The debtors are bound to the creditor/creditors on the
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 same obligation/promise that is normally created under a
single instrument.
ii. Solidary rights stem from the prevalence of several
creditors in a single right/claim. The creditors are entitled
to the single right/promise that is normally created under
a single instrument.
iii. Simple joint obligations arise in a situation where a single
instrument contains several debtors in which each one of
the debtors is only liable to his/her part of the debt.
iv. In case of solidary obligations and/or rights, there is a two-
sided legal relationship.
1. The relationship between the solidary debtors on
the one hand and the creditor on the other; or in the
event of solidary rights, the relationship between
the solidary creditors on the one hand and the
debtor on the other. This is the primary relationship
where the rule of solidarity perfectly operates.
2. The relationship amongst the solidary debtors
and/or creditors themselves. This is the secondary
relationship in which the rule of solidarity does not
normally operate.
v. Simple joint obligations and/or rights constitute a one-
sided relationship only. That is, the relation between the
simple joint debtors individually and that of the creditor;
or the relationship between the simple joint creditors
individually and that of the debtor. A single debtor does
not answer for the debts of other debtors; and a single
creditor does not claim the shares of other creditors.
vi. The higher the number of debtors and/or creditors in
solidarity, the more complex the relationship becomes.
But this is not the case in simple joint obligations/rights.

d. Modalities of plurality
i. Solidary
1. Several debtors v. the creditor.

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 2. Several creditors v. the debtor.
3. Several debtors v. several creditors.
ii. Simple: Same as in the case of solidarity but with different
options for recourse.
e. The driving principle of solidarity is convenience of the creditor
in the realization of his/her claim from the debtor/debtors.

II. SOLIDARY DEBTORS (Civ. C. Arts 1896 – 1909)

a. Solidarity between debtors consists in the fact that the creditor

is entitled to initiate legal actions for the recovery of his claim
from any one, some or all of the debtors until such time that the
obligation is fully discharged. A debtor may not avail himself of
the defense of benefit of division available for simple joint
debtors.

b. The creditor has as many actions of recourse as there are

debtors including the number of possible combinations between
the debtors in whole or in part.

c. The principle of presumption of solidary obligations has it that

unless the instrument expressly provides otherwise, joint
debtors are always solidarily liable. Art 1896. Not all legal
systems even within the Civil Law legal family do, however,
subscribe to the rule of presumption of solidarity. Art. 1202 of
the Civil Code of France, for example, specifies that there is no
presumption in favor of solidary obligations.

d. Because the extent of liability of each co-debtor is not limited to

his share of the debt, there is an implied guarantee between the
co-debtors as far as meeting the claims of the creditor is
concerned. For his share of the debt, each co-debtor is regarded
as a principal debtor while he is regarded as joint guarantor with
no recourse to the defense of benefit of discussion for the shares
of the other shareholders.

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 e. Sources of solidary obligations.

i. Contract where there is multiplicity of debtors in a single

performance.
ii. The law. E.g. Joint tortfeasors, co-offenders, persons
bound by negotiable instruments, joint heirs, debtors
jointly liable for maintenance.
iii. Acts of third parties. E.g. Charges in wills
iv. For operation of the rules of joint and several liability in
some other areas of Ethiopian law, see the following
provisions. Civ. C. Arts. 323-326, 458,507-515, 714, 919,
2086, 2126, 2129, 2130, 2155, 2156, 2195 and 2225.
Comm.C. Arts. 255, 280, 286, 301, 308, 309, 342 and 366.

III. EFFECT OF SOME LEGAL DEFENSES ON SOLIDARY OBLIGATIONS.

a. Res judicata (Civ. C. Art. 1898 and C.P.C. Art. 5). Proceedings
instituted against one debtor may not prohibit the creditor from
resorting to other creditors.

b. Notice: Placing one debtor in default amounts to placing all

others in the same. Art. 1899 cum Arts. 1772 1775. All effects
such as computation of interest, transfer of risk and interruption
of period of limitation do hold good for other co-debtors in as
much as they do with the one on whom notice is served.

c. Nullity: Art. 1900 cum Art. 1808. If the contract is void, all co-
debtors may avail themselves of the defense of nullity and may
refuse performance; if is voidable, though, only those debtors
affected by the vice may do so.

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 d. Payment and limitation: Art. 1901 cum Arts.1740 – 1762 and
Arts. 1845 – 1856. All co-debtors may invoke defenses based on
full or partial performance or on limitations of actions.

e. Remission of debt: Art. 1902 cum Art. 1825. Remission of one co-
debtor amounts to remitting all unless made specifically in favor
of that debtor. In this case, the share of the debt of the other
debtors is reduced to the extent of the amount remitted in favor
of that particular debtor. (See the Amharic version, the English is
not correct.) Unless there is an agreement to the contrary,
shares are presumed to be equal.

f. Novation: Art. 1903 –cum Arts. 1826 -1830. Same as in

Remission.

g. Set-Off: Art. 1804 cum 1831 -1841. Co-debtors may invoke the
defense of set-off against the creditor only to the extent of the
amount of their indebtedness. Again, the Amharic version is
much better in terms of clarity.

h. Merger: Art.1805 cum 1842 -1844. The share of the co-debtor

whose interest is merged with that of the creditor may be
reduced from the total debt. Again the English version has a
problem.

IV. RELATION BETWEEN THE CO-DEBTORS. - Arts. 1906 -1909.

a. A co-debtor should refrain from acts that increase the liability of

other co-debtors.

b. A co-debtor who has paid more than what he was actually

supposed to pay as his share has the right to seek contribution
from the other co-debtors.

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 c. For the claim of the co-debtor, however, there is no presumption
of solidarity as each debtor is only liable to his share of the debt.

d. If one of the co-debtors cannot pay his share, his part shall be
apportioned amongst the other co-heirs.

e. Unless agreed otherwise amongst the co-debtors, shares in the

debt are presumed equal.

V. SOLIDARY CREDITORS – (Arts. 1910 -1916)

a. Solidarity between creditors consists in the fact that any one of

the several creditors may proceed against the debtor/debtors to
realize the whole claim. It is also possible for some or all of the
creditors to jointly proceed against the debtor/debtors. A debtor
against whom an action is instituted for the recovery of the
whole claim by one or some of the creditors may not avail
himself of the defense of benefit of division so that the creditor
divide the claim and proceed only for his share.

b. The number of recourses available for creditors is dependant on

their number, their combinations and their totality put together.

c. Unlike solidary obligations, solidary rights are not presumed. The

instrument that created solidarity of creditors is always required
to clearly show prevalence of solidarity in order for the creditors
to enjoy this right. Art. 1910.

d. Because the right of each creditor in solido is not limited to his

share of the total claim, there is an implied mandate between
co-creditors in as far as their right to claim against the debtor is
concerned. For his share of the claim each co-creditor is regarded
as the principal creditor and for the chares of the other creditors
he is considered as an agent.

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 e. Performance/payment made in part or in whole to one of the
creditors is effective against all the other creditors.
f. Unless expressly instructed by one or some of the creditors
otherwise, the debtor is at liberty to pay/perform to any one of
the joint creditors. Arts. 1911(3) cum Art. 1743, C.P.C. Art. 293.

g. Sources of joint and several right are mainly contracts and

sometimes testamentary legacies. But no instances of the law
being source of a solidary right unlike in the case of solidary
obligations.

h. A Solidary right is the less common phenomenon of the two.

i. Effects of some legal provision on solidary rights:

i. Interruption of statute of limitation – Art. 1912 cum Arts.
1851 and 1852. Interruption by one creditor benefits all.
ii. Remission of debt made by one co-creditor does not affect
the others, Art. 1913.
iii. Novation by one co-creditor does not affect the rights of
other co-creditors. Arts. 1914.
iv. Set-off by the debtor against one co-debtor does not affect
the other co-creditors. Art. 1915.

j. Relationship between co-creditors.

i. Presumption of equality of shares unless agreed
otherwise.
ii. A creditor who received more than his shares shall account
for the excess to the other co-creditors.
iii. There is no solidarity between the other co-creditors in
their claim against the receiving co-creditor.

VI. SIMPLE JOINT OBLIGATIONS (NON-JOINT OBLIGATIONS).

a. Plurality of debtors and creditors alone does not always bring

about solidary obligation and/or rights. Contracts having

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 plurality of parties with separate and defined obligations/rights
may not be regarded as having joint obligations/rights even if
made in one instrument. Arts. 1918 and 1919.

b. In simple joint obligations, there are as many contracts as there

are debtors or creditors despite the fact that these contracts
stem from the same instrument.

c. Each debtor is only liable to his corresponding debt and so is

each creditor. These kinds of contracts are sometimes known as
prescription contracts.

d. A debtor sued for more than his share in the contract has the
right to invoke the defense of benefit of division.

e. The creditor may initiate an action by joining the debtors in

accordance with the relevant provisions of the C.P.C. but in
doing so he is required to show the debt of each defendant
separately. Joinder of actions but not unity of obligations.

f. Where the nature of the obligation is indivisible by operation of

the law or by the nature of the debt, simple joint obligations
may sometimes be regarded as joint obligations. Art. 1917.
These are what are sometimes known as indivisible obligations,
e.g. the obligation to construct a house or to deliver a horse on
the basis of a simple joint obligation.

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 LECTURE NOTES ON THE LAW OF CONTRACTS

ON SURETYSHIP
Tilahun Teshome (Prof.)

I. THE NEED FOR AND MEANING OF SURETYSHIP

a. The general principle in the law of obligations has it that the

property of a debtor is the pledge of his creditor. See Civ.C Art.
1988(1) and C.P.C. Arts. 151 and 154. But in the real world, this is
not always the case due to the following and similar other
reasons.
i. Insolvency/bankruptcy of the debtor
ii. Multiplicity of creditors
iii. Improper conducts of the debtor

b. In business and economic terms suretyship is a risk management

device. Normally the risk of insolvency of a debtor is to be borne
by the creditor. But in suretyship, risk is mitigated by bringing in
some other person into the obligation. In legal parlance, it is a
subsidiary contract stemming from the principal contract. It is
also referred to as personal guarantee.

c. Other modes of security devices in the Civ.C include pledge,

mortgage and antichresis. See Arts. 2825 – 2874 for pledges,
Arts. 3041 – 3116 for mortgages and Arts. 3117 - 3130 for
antichresis.

d. Distinction between insurance, warranties and suretyships.

i. Insurance is an independent contract between the insurer
and the client to cover the insurable interests of the
insured or a third party for whose befit the contract is
concluded; whereas a suretyship is a subsidiary contract
the validity of which by and large depends on the validity
of the main contract.

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 ii. Warranty is just a term in a contract between the parties
to it that would provide an additional protection for the
performance of the contract; while in suretyship the
additional protection is provided by another contract that
brings in the surety to the relationship.

e. Suretyship is thus an undertaking whereby a person obligates

himself to stand for the debt of another in the event of the
latter’s failure to pay. In the words of M. Pothier, the 18 th
Century jurist whose ideas were largely incorporated in the 1804
Code Civil of France, suretyship is :
a contract, by which a person obliges himself on behalf of
a debtor to a creditor, for the payment of the whole, or
part of what is due from such debtor, and by way of
accession to his obligations.

f. The undertaking assumes two obligations and three parties (a

triangular K). The primary obligation is the one between the
creditor and the principal debtor, while the secondary one is that
between the creditor and the surety. The parties are the
creditor, the principal debtor and the surety.

g. The source of the principal obligation may be contractual or

extra-contractual while that of the suretyship is always
contractual. The Difference between suretyship and bail bond in
criminal law is also an issue to take note of.

h. The law of suretyship thus attempts to provide answers to such

questions as for whom, in whose favor, for what kinds of
obligations and in what manner the contract of suretyship is to
be concluded. It also regulates the relationship between the
creditor and the surety, the surety and the principal debtor and
relations between several sureties, if there are any.

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 i. The Civil Code makes use of the terms suretyship and personal
guarantee interchangeably, while there are some differences
between the two in other legal systems. At common law, for
example, the surety is jointly and severally liable with the
principal debtor while a guarantor is one who is secondarily
liable in the event of default of the principal debtor.

II. MAIN FEATURES OF SURETYSHIP

a. Suretyship is a benefactory contract. The surety does not

normally require consideration from the principal debtor. The
fact that a surety may be given with or without the consent or
the knowledge of the principal debtor (Art. 1921) is an indication
of this fact. But the surety and the principal debtor may, at their
pleasure, agree to provide some kind of consideration for the
surety although such agreements do not in any way affect the
right of the creditor against the surety. Such agreements create
two separate rights in favor of the surety.
i. To claim from the debtor what he has paid to the creditor.
ii. To claim the value of the consideration for the surety.

b. Suretyship is an accessory obligation. Its existence and validity is

dependant on the existence and validity of the main contract.
(Arts. 1923/1 and 1926/1). The extinction in any form of the
primary obligation extinguishes the obligation contained in the
suretyship. There are, however, exceptions to this general rule
where the primary obligation is voidable as is the case under
Arts. 1923/3 and 1926/6.

c. It is required to be clear and unequivocal as the obligation of

suretyship is not presumed. This shows that the standard of
proof in the event of surety is much stronger than other forms of
contract. It shall also be made in writing, express and should not
be meant to go beyond the contractual limit which again is
necessary to be stated in the contract. (Arts. 1922, 1725/a and

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 2003). At Common Law too, suretyship is a form of obligation
required by the Statutes of Frauds to be made in special form. It
is what is termed as “a special promise to answer for the debt,
default or miscarriage of another person”.

d. Suretyship is an obligation that is not more onerous than the

primary obligation. It should not be made on terms that are
more burdensome than the latter. Where such is so, the excess is
reduced to the limit of the primary obligation. After the making
of the contract, the creditor and the principal debtor may not
conclude a contract that would increase the liability of the
surety. Even the time agreed for performance of the obligation
may not be changed or elongated without the express consent of
the surety. (Arts. 1924 and 1928)

e. Suretyship pertains to a specified amount of obligation. It is

invalid unless such amount is clearly stated in the instrument
that created the surety. Even if it is given for future or
conditional obligations, it is of no effect unless the maximum
amount of the surety is expressly stipulated. If the time for the
duration of the liability is not stated in the contract, the surety
may bring an end to his obligation so long as performance of the
obligation is not due. (Arts. 1922/3 and 1925).

f. Suretyship is an undertaking specifically given by the surety to

the creditor. No other person may avail himself of this right
unless the creditor has validly assigned the same to this third
person. (Art. 1920)

III. RELATIONS BETWEEN THE CREDITOR AND THE SURETY

a. Traditional defenses. The surety may invoke all the defenses

that are personal to the principal debtor such as statute of
limitation, benefit of time, payment, nullity of the primary
obligation, notice and remission of debt made in favor of the

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 debtor. He may also invoke grounds that would make the very
suretyship null and void. These are known as traditional
defenses. See Arts. 1923, 1926 and 1927.

b. The benefit of discussion (beneficium ordinis seu excussionis)

(Arts. 1934 -1937)
i. The surety may require the creditor to first proceed
against the debtor prior to resorting to him.
ii. The right to the defense of benefit of discussion is,
however, a matter that requires to be pleaded by the
surety as he is proceeded against. If it is not invoked at the
time of the suit, it is deemed waived. (Art. 1935) This is
similar to points of preliminary objection under Art. 244 of
the C.P.C.
iii. Surety is also required to adequately describe the assets of
the principal debtor against which the creditor may take
actions. The assets to be discussed are likewise required to
be unencumbered by other creditors and not to be out
side the judicial jurisdiction of the court. In addition, the
surety is duty bound to advance sufficient money to cover
the cost of the discussion.(Art. 1936)
iv. The two advantages of discussion. (Art. 1937)
1. Deferral of judgment against the surety.
2. Failure by the creditor to adequately describe the
assets of the principal debtor is within the risk of the
creditor.

c. The benefit of division (beneficium divisionis). Art. 1951.

i. Benefit of division presupposes the existence of several

sureties for the same obligation and to the same debtor. It
is applicable when one of the sureties is sued for the
whole or more than a pro rata share of the primary
obligation.

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 ii. The surety who is proceeded against may require the
creditor to divide his share of the debt. Each individual
surety is a principal debtor to his share and a guarantor to
the individual shares of the other co-sureties. But only in
the case of insolvency of another surety may a surety be
obliged to cover the share of that other surety.
iii. In short, the plea of benefit of division converts the
liability of the co-sureties from several to pro-rata.
iv. Of course, even in the case of several sureties, any one of
them may always avail himself of the defense of benefit of
discussion.
v. The defense of benefit of discussion is only dilatory as it
simply postpones the action of the creditor, whereas that
of benefit of division is preemptory as it determines the
extent of liability of the surety.

d. Summons to proceed. Art. 1938

i. This pertains to the right of the surety to demand the
creditor to bring an action against the principal debtor
where the obligation falls due.
ii. The time limit for so doing under the Civ. C. is six weeks
following the notice reminding the creditor to proceed
against the debtor.
iii. The surety shall be absolved of any liability arising out of
his obligation if the creditor fails to do so, or if he fails to
continue the proceedings with due diligence.
iv. The rule is meant to protect the surety against collusion
between the creditor and the principal debtor or against
recklessness by the creditor.

e. Tender of payment. Art. 1939

i. Where the debt is due, the surety may require the creditor
to accept performance and/or payment.

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 ii. In so doing he may likewise require the creditor to hand
him over all the documents and securities that would
entitle him proceed against the principal debtor.
iii. Refusal by the creditor to do so may relieve the surety of
any obligations to the former.
iv. This is a mechanism devised to protect the surety from
further damages and costs resulting from procrastination
of the creditor.

IV. RELATIONS BETWEEN THE PRINCIPAL DEBTOR AND THE SURETY.

a. The right to indemnification by the principal debtor. Art. 1940.

Normally a surety is one who pays for another and, as such, he
has the right to get back what he pays from that other. Once the
creditor is paid, the surety becomes the new creditor on the
same debtor.

b. Scope of indemnification. The surety’s rights extend to the

principal debt, the interest thereon and the costs incurred
thereto, in addition to whatever damages he has sustained on
account of the debtor’s failure to live up to his expectations.
Arts. 1940(2)(3) and 1941.

c. Benefit of subrogation (Arts. 1944 and 1945). The surety steps

into the rights of the principal debtor upon payment since his
doing so extinguishes the contractual relationship between the
creditor and the principal debtor. Another important point to
take note of is the fact that the benefit may not be contracted
away in advance. The benefit of subrogation here is that of legal
and not conventional.

d. Creditor is also bound to hand over all securities and documents

of title to the surety under pain of loss of his right against the
latter.

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e. Distinction between a direct (chirographic) action (Art. 1940) and
the benefit of subrogation (Art. 1944) in so far as they relate to
the surety’s right to indemnification.
i. The direct action only entitles the surety to claim from the
principal debtor.
ii. Subrogation, however, goes beyond that and enables the
surety to realize the security interests the creditor has
over movables or immovables that were employed to
secure the debt. Whether or not these securities belong to
the principal debtor is immaterial.

f. When there exist several principal debtors in solido, he who

became a surety to them has his remedy against each of them to
the tune of the entire claim.

g. Second payment. (Art. 1943). Whenever the surety makes

payment to the creditor, he is required to inform the principal
debtor of this fact. Failure to do so may deprive him of his right
of indemnification in the event the debtor settles accounts with
the creditor without any prior knowledge of this payment. But
the surety may demand reimbursement from the creditor for the
simple reason that one cannot be paid twice.

h. Failure by the surety to deliberately raise defenses of the

principal debtor may result in the loss of the surety’s indemnity
claim. Such are what are known as traditional defenses of nullity,
payment and extinction of obligations. (Arts. 1942 1nd 1926/3)

i. Rights of surety against the principal debtor before payment.

These are known as anticipatory recourses of the surety. (Arts.
1948 and 1928)
i. Where the creditor has served notice on the debtor.
ii. Where the debtor is declared bankrupt.

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 iii. Where the obligations of the surety are likely to become
more onerous on account of financial losses suffered by
the principal debtor.
iv. Extension of the time given to the debtor by the creditor
without the agreement of the surety.

V. RELATIONS AMONG CO-SURETIES. Art. 1951

a. Co-sureties are persons who guarantee the same debtor/debtors

to the same debt.

b. Benefit of contribution. One of several co-sureties who has paid

the whole debt, despite his right to invoke the defense of benefit
of division against the creditor, has the right to resort to the
other co-sureties for contribution in as much as a co-debtor who
has paid over and above his share of the debt to the creditor
does. Such a co-debtor need not bring an action against the
principal debtor before proceeding against the other co-sureties.

c. The fact that the suretyship is made in one instrument or not

does not have any bearing in as far as the rights of the paying co-
surety is concerned.

d. Unless there is an agreement to the contrary between the co-

sureties, the shares of co-sureties are presumed to be equal.

e. A paying surety is duty bound to raise all defenses that would

absolve the principal debtor of his liability under the contract
under pain of losing his right to demand contribution from the
other co-sureties in as much the same manner as he loses his
right of indemnity in his relations with the principal debtor.

f. Distinction between the counter-surety and the secondary

surety. Arts. 1949 and 1950.

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 i. A counter-surety covers the risk of the surety, but he does
not have any legal relationship with the creditor. His
responsibility is to cover the damage caused to the surety
on account of failure by the principal debtor to discharge
his obligations. Where both the surety and the principal
debtor cannot pay, the creditor does not have any
recourse with the counter-surety.
ii. A secondary surety is, however, liable to the creditor
should the surety and the debtor fail to discharge their
obligation. He is the last person in the line of responsibility
to the debtor. First the principal debtor; then the surety,
and finally the counter surety.
iii. How may a counter-surety and a secondary surety exercise
their right of indemnification?

VI. OTHER ISSUES IN RELATION TO SURETYSHIP

a. Joint surety.
i. Unless the agreement of suretyship expressly provides
otherwise, suretyship under Ethiopian law is always
simple. There is no presumption of solidarity between a
principal debtor and a surety. Arts. 1934 and 1935.
ii. A joint surety, once this is established, is jointly and
severally liable to the creditor. For this main reason, he
can invoke neither the benefit of discussion nor that of
division when he is proceeded against by the creditor.
iii. But when it comes to contribution, unlike co-debtors
bound in solido, the ultimate responsibility of payment
rests on the principal debtor. The joint debtor has all the
legal backing to step into the rights of the creditor,
including that of the benefit of subrogation, when he
proceeds against the principal debtor.

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b. Extinction of suretyship.
i. The full performance by the principal debtor of his
obligations is the most important ground for extinction of
suretyship. Arts. 1926(1) and 1927.
ii. Acceptance by the creditor immovables from the debtor
liberates the surety even if the creditor is evicted
afterwards.
iii. A suretyship may come to an end on grounds that are
applicable to extinction of contractual obligations.

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 LECTURE NOTES ON THE LAW OF CONTRACTS
ON SPECIAL ISSUES RELATING TO
OBJECTS OF CONTRACTS
Tilahun Teshome (Prof.)

I. PRELIMINARY POINTS

a. The doctrine of freedom of K has it that parties have full

measure of autonomy to determine the subject matter of their K.
This is only subject to limited exceptions imposed by the law in
consideration of the general public interest. See Civ. C. Art. 1711.

b. Questions such as: With whom to conclude a K? How to

conclude? What its terms and conditions may be? In what ways
should the obligations be performed? What additional means of
guaranteeing performance should be ensured? What civil
sanctions should be imposed on a recalcitrant? What form
should communications of the parties assume? In what ways
may disputes stemming from the K be resolved? And similar
others are, by and large, left for the parties to regulate.

c. The purpose of the law is to lay down general guidelines that are
meant to help parties when they contemplate of concluding Ks.
The provisions of the law are mostly permissive in nature in the
sense that they can be derogated from by the parties.

d. Some of these provisions are the ones that we find under

Chapter Four of Title Twelve of the Code (Arts. 1857 – 1895),
with separate sections on Terms, on Conditions, on Alternative
Obligations, on Earnest and on Provisions as to Liability.

II. TERMS IN CONTRACTS (Arts. 1857 -1868)

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a. Terms of contract relate to the time span in which parties bound
themselves to perform their obligations under a K. Term is thus
generally a space of time granted to the debtor to perform his
obligations.

b. It goes without saying that a K’ual obligation can be assumed

with or without a term for discharging it. In most Ks that we
conclude in our day-to-day lives, without even having the
knowledge that we are doing so, the obligations of the parties
are discharged simultaneously.

c. Where there is no term, both parties carry out their obligations

when the transaction takes place. When there is a term, though,
he who has not discharged his obligation fully or in part at the
time of conclusion of the contract may avail himself of the
benefit of time stipulated in the K. (Art. 1865) Either of the
parties may be beneficiaries of term, depending on the level of
performance of each one’s obligations. Under exceptional
circumstances, even the creditor may benefit from time. See Art.
1867.

d. Waiver of benefit of time. The debtor may perform the K even

before the time set for so doing runs unless the K compels him
not to do so in the interest of the creditor. But he cannot be
forced to discharge it so long as his obligation has not matured.
Art. 1866. Payment made before the date stated in the K is not
recoverable by the paying debtor since it brings an end to the K.

e. A term may be express or implied.

i. It is express when a clear stipulation to that effect is made
in the instrument in which the K is drawn up.
ii. It is implied when the nature of the obligation assumed by
one party or both is such that it requires a fairly
reasonable time for its consummation.

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 f. A term may likewise be either of right or of grace.
i. It is a term of right when it is agreed that the contract will
be carried out within a specified period of time.
ii. It is a term of grace when a creditor, the law or a judge
gives the debtor additional time to discharge his
obligations. See, for example, Civ. C. Art. 1770.

g. Insolvency of the debtor or other inappropriate acts committed

by him may bring an end to his right to benefit from time.

h. For the different modes of computation of contract time see

Arts. 1852 -1863.

III. CONDITIONAL CONTRACTS

a. In the ordinary course of events, a conditional obligation is one

the performance of which depends on the occurrence (positive
condition) or the non-occurrence (negative condition) of an
uncertain event that is beyond the control of the parties. (Arts.
1869).

b. To constitute a condition, the fact must be future and uncertain.

Uncertainty of the condition should not also be subject to the
will of the parties to make it happen or to prevent its happening.
If so it becomes potestive, or unbalanced, and nullifies the
agreement on the condition and, at times, the K itself. (Art.
1879) See also the provisions of Arts. 916 – 919 for suspensive
and resolutive conditions in a testamentary legacy.

c. As in all other aspects of K’ual objects, the condition should

likewise be lawful, possible and should stand the society’s test of
morality. (Art. 1878).

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 d. Conditions are classified as conditions precedent and conditions
subsequent under the Civil Code.
i. In a condition precedent, the condition must precede in
order for the obligation to be performed. Condition
precedent is also called suspensive condition since
performance of the contract is suspended until such time
that the uncertain event materializes. (Art. 1871) It is a
condition that should be met to the vesting of any liability
on the other party to perform his part of the K’ual
obligation.
ii. In a condition precedent, the condition brings an end to
the validity of the contract. Obligation is valid only until
the occurrence or otherwise of the stipulated condition. It
is sometimes referred to as a resolutive condition as its
occurrence or non-occurrence halts performance, thereby
extinguishing the obligation. (Art. 1872). It is some fact or
event other than performance itself which the K provides
shall relieve a debtor of his obligation.

e. The place of good faith in conditional contracts. (Arts. 1870 and

1873). As conditions in a contract are treated as uncertain and
future events, parties should not prevent the occurrence or
otherwise of the events contemplated therein. Nor should they
be responsible for their materialization. The party who does so
will be responsible for the damages that the other party sustains
as a result. Insurance contracts are typical examples in this
regard.

f. Acts of management and acts beyond management. (Arts. 1874

and 1875). Unless done in good faith, such acts remain valid even
if they are done prior to the occurrence of the condition.

IV. ALTERNATIVE OBLIGATIONS (Arts. 1880 – 1882)

a. Alternative obligations envisage situations in which the debtor
may perform any one of several obligations. Unless the contract

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 provides otherwise or the debtor himself waives this right, the
choice is always left for him. Performance of any of them relives
him of his responsibility in the contract.

b. But debtor cannot perform part of this and part of that

obligation.

c. It can also be stipulated that the choice is to be made by the

creditor or by a third party for whose benefit the contract is
concluded. In that case, the creditor or the third party
beneficiary has the same right the law accords on the debtor.

d. Where performance of one of the obligations is impossible, the

debtor may perform the other unless he is at fault in which case
the other party may claim damages for losses that he suffers as a
result.

V. EARNEST (Arts. 1883 -1885)

a. Although the law does not clearly provide that, earnest is a sum
of money paid by a buyer to a seller to show his seriousness to
consummate the transaction.

b. If the contract is concluded as earlier agreed, the earnest money

is considered as part of the price.

c. But in K with earnest any one the parties may bring an end to it.
The party who paid the money may do so by forfeiting the
earnest sum to the recipient and the party who received the
money may similarly do so by giving double the earnest sum to
the payer. This is what differentiates earnest from a down
payment. In the latter case, the K cannot be cancelled unless
there are justifiable grounds for so doing.

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 LECTURE NOTES ON THE LAW OF CONTRACTS
ON THIRD PARTIES IN RELATION TO CONTRACTS

Tilahun Teshome (Prof.)

I. THE PRINICIPLE OF RELATIVITY OF CONTRACTS.

a. In the ordinary course events, Ks produce rights and obligations

only on those who consented to their making. See Civ. C. Arts.
1675, 1731 and 1952. The classical theory of privity of contracts
has it that a person not in privity (a party) could not sue or be
sued on a K. It was thus held that no one may be entitled to or
be bound by a K to which he is not an original party.

b. For practical reasons, however, this principle is subject to quite a

good number of exceptions. Economic necessities, expediency of
commercial interactions and societal needs in general may make
it incumbent for the law to provide leeway for circumstances
that give rise for strangers to be attracted to a K. these strangers
are those whom the law refers to as third parties.

c. With this in view, the Civil Code recognizes several incidences in

which third parties may be brought to and thereby assume rights
and obligations that arose under a K in which they did not take
part. The following are the most notable ones.

II. PROMISE FOR ANOTHER. (Civ. C. Arts. 1953 – 1956)

a. This is an age old Roman law concept whose practical application

is on the decline in modern business. Most major international
contract instruments do not have much to say on it. But parties
may make K’ual arrangements similar to these rules at their
pleasure.

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 b. The Civil Code considers the problem in the following two ways:
i. Declaration of command, Arts. 1953 and 1954.
ii. Promise for third party, Arts. 1955 and 1956.

c. In both cases, the Ks are concluded for and on behalf of third

parties. In a declaration of command, one of the parties may
reveal that he will bring in some one to the K within an agreed
period of time after which that third party shall become the real
contracting party and assume all the rights and obligations
therein. If the other party agrees to this condition, the K is
concluded. The responsibility of the person declaring the
command is to bring in the named third party to the K within the
agreed time. In that case, he will be relieved of all his obligations
in the K. If he fails to do so, he will continue as though he were
the real K’ing party.

d. In promise for third party, the promisor undertakes to do or to

refrain from doing an act on behalf a third party. If the third
party ratifies the undertaking, the promisor is relieved of his
obligations. If not, the promisor either continues in the K as if he
were its party or the K may be cancelled subject to the
promisor’s liability to make damages good to the other K’ing
party. The promisor is considered as the agent of the third party
if that third party ratifies the promise.

III. CONTRACTS FOR THE BENEFIT OF THIRD PARTIES.

a. Where there is an agreement in a K that one of the parties shall

perform a defined obligation to a non-contracting party
designated therein, it is said that the contract is one made for
the benefit of a third party. (Civ. C. Art. 1957) Under such a
scenario, three parties are involved.
i. The person assuming to perform the obligation, i.e. the
debtor.

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 ii. The one who agrees that his part of the right shall be
performed in favor of another person, i.e. the stipulator.
iii. The one in whose favor the obligation is to be discharged,
i.e. the third party beneficiary.

b. Relative rights and obligations of the three parties:

i. The stipulator. (Art. 1958)
1. He is originally the creditor in the K and remains so
until the third party beneficiary unequivocally
accepts the benefit of stipulation.
2. He may subject the benefit of stipulation to the
choice of the third party or deprive the latter of the
same.
3. He may require the debtor (promisor) to perform
the K for him as long as the latter has not done so
for the third party beneficiary.
4. He may designate another beneficiary in place of the
original one.
5. He may reduce the benefit of stipulation or
designate another to share the benefit of
stipulation.
6. But this may be qualified by a separate agreement.
7. He cannot change his mind after the benefit is
accepted by third party.
ii. The third party beneficiary. (Arts. 1959 and 1960)
1. He has the right to accept or to renounce the benefit
of stipulation.
2. He steps into the rights of the stipulator to the
extent of the scope of right stipulated in his favor.
3. He may require the heirs of the stipulator to abide
by the benefit of stipulation if it is to be performed
upon the death of the stipulator.
iii. The debtor. (Art. 1961)

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 1. He is liable to the third party beneficiary, upon the
latter’s acceptance of the benefit, to the tune of the
stipulation.
2. He may refuse to tender performance if the
stipulator withdraws the benefit that was not
subjected to acceptance by the beneficiary.
3. He may not raise defenses of personal nature which
he has against the stipulator once the beneficiary
accepts the stipulation.
4. He may, of course, set up personal defenses that he
has against the beneficiary.
c. Consideration and the stipulation for the benefit of third parties.
i. Donee beneficiaries
ii. Creditor beneficiaries

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