Interactive Guide to Extinction of Obligations in Ethiopian Contract Law

Extinction of Obligations

An Interactive Guide to Ethiopian Contract Law Principles

This guide explores the various ways contractual obligations can be extinguished under the Ethiopian Civil Code, offering detailed explanations and interactive examples.

Introduction to Extinction of Obligations

Once a contract is formed, it creates obligations between the parties. However, these obligations do not last forever. This chapter delves into the various grounds on which contractual obligations cease to exist, as outlined in Articles 1806 and 1807 of the Civil Code. Understanding these mechanisms is crucial for comprehending the full lifecycle of a contract.

1. Performance of Contract

One of the most common ways for a contractual obligation to be extinguished is through its performance. When parties fulfill their agreed-upon duties according to the terms of the contract and mandatory legal provisions, the obligation comes to an end.

Key Aspects of Performance

Performance must be in legally required conformity with the contract.
Any discrepancy, such as delivering a different item than agreed, means the obligation is not extinguished.

Example: If someone agrees to deliver a Mercedes car but actually delivers a Vitara, the obligation is not extinguished because the performance is not in conformity with the agreement.

2. Invalidation and Cancellation of a Contract

Invalidation and cancellation are distinct mechanisms that render a contract ineffective, leading to the extinction of obligations. While both result in restitution, their grounds and effects differ significantly.

Distinguishing Invalidation and Cancellation

Feature	Invalidation	Cancellation
Grounds	Defect in contract formation (e.g., lack of capacity, vitiated consent)	Non-performance of contract
Effect on Contract	Makes an effective contract ineffective due to a problem in its formation.	Makes a validly formed contract ineffective due to breach.
Primary Remedy	Restitution (parties returned to pre-contractual position)	Restitution, plus compensation for "benefit of contract" (expectation damages)
Nature of Effect	Retrospective (as if contract never existed)	Retrospective (as if contract never existed)

Entitled Parties for Invalidation (Art. 1808 C.C)

Generally, only the party affected by the defect can request invalidation, but there are exceptions:

Affected Party (Art. 1808 (1)): For defects in consent or incapacity, only the injured party (or their representative, e.g., a minor's tutor) can request invalidation.
Any Party / Interested Third Party (Art. 1808 (2)): For contracts with unlawful/immoral objects or non-compliance with prescribed form, any contracting party or interested third party can request invalidation.

Discussion: Article 1808 (2) does not explicitly include contracts whose object is not sufficiently defined or impossible. However, by analogical interpretation, and considering other Civil Code articles (e.g., 1714 (1), 1715 (2), 1716 (2), 1720 (1)) which render such contracts ineffective, it is advisable that Art. 1808 (2) should include them.

Void vs. Voidable Contracts

A critical distinction in contract law:

Void Contracts: Have no legal effect from the very beginning. They are "of no effect" by law (e.g., unlawful/immoral object, impossible object, non-compliance with form - Art. 1714 (1), 1715 (2), 1716 (2), 1720 (1)). There is no obligation created to be extinguished.
Voidable Contracts: Are potentially effective but can be rendered ineffective at the request of an entitled party (e.g., due to lack of capacity, vitiated consent - Art. 1808 (1)). Unless invalidated, they are upheld.

Discussion: Article 1808 (2) states that void contracts "may be invalidated." This phrasing seems to contradict the nature of void contracts (which are ineffective from the start) and other Civil Code provisions. If a contract is void, no legal obligation is created, making "invalidation" to extinguish an obligation unnecessary. This suggests a potential conceptual inconsistency within the Civil Code's framework.

Refusal of Performance & Time Limitation

Refusal of Performance (Art. 1809): A party entitled to invalidate a contract can refuse performance at any time, thereby extinguishing the obligation without formal invalidation.
Time Limitation for Invalidation (Art. 1810): An action for invalidation must be brought within two years from the disappearance of the ground (e.g., knowledge of mistake, avoidance of duress, attainment of capacity). For unconscionable contracts where the injured party is of age, the two-year period runs from the making of the contract.

Discussion: Article 1810 states "no contract shall be invalidated" after two years. This suggests the court might prevent invalidation on its own motion, even if the period of limitation is not pleaded, which is unusual for prescription (usually a preliminary objection). This raises questions about the interplay between substantive and procedural law.

Circumstances for Upholding Invalid Contracts

Despite grounds for invalidation, a contract can be upheld under certain conditions:

Confirmation by Injured Party (Art. 1811): The injured party can waive their right to invalidation after the vitiating cause disappears. If the original contract required a special form, the confirmation must also be in that form.
Putting an End to Action (Art. 1812): In unconscionable contracts, the other party can prevent invalidation by offering to compensate for the injury, effectively amending the contract.
Partial Invalidation (Art. 1813): If only a part of the contract is invalid, only that part is invalidated, provided it doesn't affect the contract's essence.
Inquiry about Intention (Art. 1814): A party with the right to invalidate/cancel must respond to an inquiry about their intention; failure to respond leads to a presumption of invalidation.

Effect of Invalidation or Cancellation (Art. 1815 C.C)

Both invalidation and cancellation primarily result in the extinction of contractual obligations and the reinstatement of parties to their pre-contractual position.

Reinstatement (Art. 1815 (1)): Parties are restored to their original position, and any performed obligations are reinstated (e.g., reclaiming goods or money).
Acts of Performance Nullified (Art. 1815 (2)): Any performance rendered under the contract becomes null and void.

Discussion: While both involve restitution, cancellation can additionally entitle the party to compensation that rewards the "benefit of contract" (expectation damages, Art. 1790 (1)). Invalidation, however, is followed by compensation aimed solely at reinstating the party to their original position (Art. 1817). Thus, cancellation can lead to a broader scope of damages.

Limitations on Reinstatement

Rights of Third Parties (Art. 1816): Reinstatement is limited if it harms the interest of third parties acting in good faith (i.e., those unaware of the contract's invalidity or cancellation).
Impossibility/Disadvantage (Art. 1817): If reinstatement is impossible, seriously disadvantageous, or inconvenient for one or both parties (e.g., consumed goods, used materials), the acts of performance may be upheld, and monetary compensation or other remedies ordered instead.
Unlawful Enrichment (Art. 1818): Principles of unlawful enrichment may be applied when restoring parties to their position.

3. Termination of Contract

Termination of a contract makes it ineffective from the time of termination, meaning it has prospective effect. This distinguishes it fundamentally from invalidation and cancellation, which have retrospective effects.

Types of Termination

Bilateral Termination (Art. 1819 (1)): Parties can mutually agree to terminate a contract, either through a pre-existing termination clause or a subsequent agreement. This is itself a contract to extinguish an obligation.
Unilateral Termination: Made by one party, either through a unilateral termination clause in the contract, fulfillment of a condition entitling unilateral termination, or by giving advance notice (time fixed by law, custom, or reasonable agreement).
Judicial Termination: A contract can be terminated by court order, which is considered the principle, as parties should not be judges in their own case.

Grounds for Judicial Termination

Special Relation Between Parties (Art. 1823): If a contract requires special confidence, cooperation, or community of views, and these requirements cease, a party may apply to the court for termination. The court has discretion in determining if these requirements have ceased.
Gratuitous Contracts (Art. 1824): For contracts made for the exclusive advantage of one party (gratuitous), the other party may request court termination for "good causes" (e.g., the beneficiary's unemployment ceasing).

Comparison: Invalidation & Cancellation vs. Termination

The fundamental difference lies in their effect:

Retrospective Effect: Invalidation and cancellation have retrospective effect (Art. 1815), meaning parties are returned to their pre-contractual position, and past performances are reversed (restitution).
Prospective Effect: Termination has prospective effect (Art. 1819 (2) & (3)), meaning obligations cease only from the time of termination. Past performances are generally not reversed.

Example: If a contract for monthly coffee delivery is terminated, parties are not required to return past deliveries or payments. However, if it's invalidated or cancelled, past deliveries/payments would need to be returned.

Discussion: The rationale for the difference in effect (retrospective vs. prospective) is rooted in the grounds. Invalidation/cancellation address fundamental flaws (formation defects) or breaches (non-performance) that undermine the contract's very existence or purpose, hence a "reset" is needed. Termination, however, often arises from a change in circumstances or mutual agreement, where the contract was valid and performed for a period, making a complete undoing impractical or unfair. It acknowledges the contract's past validity while allowing for future cessation.

4. Remission of Debt

Remission of debt is the voluntary release of a debtor from their obligation by the creditor. It is a specific ground for the extinction of obligations under the Civil Code.

Principle of Remission (Art. 1825 C.C)

When a creditor informs the debtor that they are released from their obligation, the obligation is extinguished. However, this is not absolute; the debtor has a right to refuse the remission.

Creditor's Willingness + Debtor's Non-Objection: The creditor's willingness to release the debtor is necessary, but the debtor's express acceptance is not. If the debtor does not object immediately upon being informed, silence is presumed as acceptance.

Discussion: A debtor might refuse remission for several reasons: to maintain good credit standing, to avoid a perceived moral obligation, to prevent potential tax implications (remitted debt might be considered income), or if the remission comes with undesirable conditions. Refusal asserts autonomy and allows the debtor to fulfill their commitment if they wish.

5. Novation

Novation is the substitution of an existing obligation with a new one that differs in its object or nature. It extinguishes the original obligation and replaces it with a completely new one.

Principle of Novation (Art. 1826 C.C)

Novation occurs when parties agree to replace an existing obligation with a new one that is substantially different in its object (what is owed) or nature (the type of obligation).

Example: If Kemal agrees to deliver 100 kg of sugar to Lelisa, and later they agree to replace this with 50 kg of coffee, this is novation because the object has changed. However, merely changing the place of delivery (e.g., from Addis Ababa to Mekelle) is not novation, as neither the object nor the nature changes substantially; it's a variation.

Example (Change in Cause): B owes A $10,000 for goods. Later, they agree B will keep the $10,000 as a loan from A. The object is the same, but the *cause* of the debt changes (from purchase to loan), which constitutes novation.

Intention and Absence of Novation

Intention to Extinguish (Art. 1828): Novation requires a clear and unequivocal intention by the parties to extinguish the original obligation. This intention cannot be presumed.
Absence of Novation (Art. 1829): Certain acts do not, by themselves, constitute novation unless explicitly agreed otherwise. These include preparing a new document for an existing debt, signing a promissory note/bill of exchange for an existing debt, or providing new securities. These are illustrative, not exhaustive.

Novation in Current Account (Art. 1830 C.C)

No Novation from Entries (Art. 1830 (1)): Simply recording credit and debit items in a current account does not constitute novation.
Novation on Finalization (Art. 1830 (2)): Novation occurs when the final balance of a current account is calculated and admitted by the parties. The individual obligations are then substituted by this final sum.
Securities Exception (Art. 1830 (3)): Unlike general novation, securities attached to individual items in a current account are retained even after the balance is finalized and admitted, unless otherwise agreed.

Effect of Novation (Art. 1827 C.C)

Novation extinguishes not only the principal obligation but also its accessory obligations (e.g., pledges, mortgages, personal guarantees), unless expressly provided otherwise.

Example: If Lelisa bought a truck on loan from Mesfin Industrial Engineering, with a guarantor for payment, and then novation occurs (e.g., price substituted by one-year service), the guarantor's obligation to pay the price extinguishes. It does not transfer to the new obligation unless the guarantor agrees.

Contrast with Current Account: If the truck sale was part of a current account, and novation occurs when the balance is finalized, the guarantor's obligation *does not* extinguish; it transfers to the new obligation (the final sum), due to the exception in Art. 1830 (3).

Period of Limitation: Novation creates a new obligation, and thus a new period of limitation starts to run for the new obligation, distinct from the original one.

6. Set-off

Set-off is a mechanism by which two reciprocal debts are extinguished to the extent of the lesser amount. It occurs when two persons owe debts to one another, under specific conditions.

Principle of Set-off (Art. 1831 C.C)

When two parties are both debtors and creditors to each other in different transactions, their obligations can be extinguished by set-off.

Example: Ato Abebe owes Ato Tolosa Birr 500,000 in one transaction, and Ato Tolosa owes Ato Abebe Birr 500,000 in another. They can set-off their debts, extinguishing both obligations.

Positive Conditions for Set-off (Art. 1832 C.C)

Money Debts or Fungible Things: Both debts must be money debts or relate to a certain quantity of fungible things of the same species (e.g., two debts in Birr, or two debts in 100 kg of coffee).
Liquidated: The debts must be certain and their amount undisputed. If contested, the debt is not liquidated.
Due: Both debts must be due at the time set-off is required.

Exceptions to Positive Conditions

Unliquidated Debt (Art. 1841): Even if one debt is not fully liquidated, the court may allow set-off to the extent of the admitted amount. If a debt can be liquidated without delay, the court may suspend judgment on the liquidated debt until the other is liquidated.
Period of Grace (Art. 1834): Granting a period of grace to a debtor does not prevent set-off, as the debtor is not protected against set-off like other beneficiaries of time limitation.

Negative Conditions for Set-off (Art. 1833 C.C)

Set-off is generally allowed regardless of the cause of either obligation, except in specific cases:

Special Nature of Obligation (Art. 1833 (a)): If set-off would harmfully affect one party due to the obligation's special nature (e.g., maintenance or wages necessary for livelihood).
Obligation to State or Municipality (Art. 1833 (b)): To avoid messing up accounting systems due to different causes of debt/credit.
Obligation to Restore Unjustly Deprived Thing (Art. 1833 (c)): To deter unjust deprivation of property (e.g., theft).
Obligation to Return Deposited Thing (Art. 1833 (d)): To protect and encourage trust built among parties (special confidence).

Intention, Waiver, and Extension of Set-off

Intention to Effect Set-off (Art. 1838): Set-off requires the debtor to inform the creditor of their intention. The court cannot make set-off on its own motion unless pleaded.
Waiver of Right to Set-off (Art. 1839): Parties can waive their legally permitted right to require set-off in advance, which encourages further transactions.

Discussion: Allowing waiver of set-off encourages further business transactions. A debtor might be hesitant to enter a new contract with a creditor if they fear the creditor will set-off a future claim. Legal recognition of waiver provides certainty and allows parties to rely on promises not to set-off, fostering economic and social advancement.

Extension of Set-off (Art. 1840): Parties have the freedom to extend set-off beyond legally permissible ones or set aside certain conditions (e.g., allowing set-off for debts not yet due, or for non-money/non-fungible debts).

Effect of Set-off (Art. 1836 C.C)

Set-off extinguishes obligations to the extent of the lesser debt.

Example: If A owes B Birr 500 and B owes A Birr 1000, set-off occurs up to Birr 500. The remaining Birr 500 is still owed by B to A.

Discussion: A creditor can refuse part payment (Art. 1746 (1)). However, a creditor cannot refuse set-off on the grounds that it only extinguishes part of the debt. This is because set-off is a distinct legal mechanism for extinction, not a mode of payment. Set-off is valid even with an incapable person, unlike payment to an incapable person unless they benefited.

Rights of Third Parties & Appropriation of Payments

Rights of Third Parties (Art. 1837): Set-off cannot affect the rights of third parties on one of the debts. Its effect is limited to the parties making the set-off.
Appropriation of Payments (Art. 1835): When multiple debts are liable to set-off, the rules for appropriation of payments (Art. 1752, Art. 1753, Art. 1754) apply. Generally, costs are extinguished first, then interest, then principal.

7. Merger

Merger is a unique ground for the extinction of obligations that occurs when the positions of creditor and debtor become unified in the same person.

Principle of Merger (Art. 1842 C.C)

Merger happens when the same person becomes both the creditor and the debtor for the same obligation, making performance to oneself absurd. Common reasons include succession (inheritance) or formation of a partnership.

Example: Ato Haile borrowed Birr 25,000 from his father, Ato Aklilu. If Ato Aklilu dies and Ato Haile is his only successor, Ato Haile becomes the owner of his father's property, including the debt. His obligation to pay himself is extinguished by merger.

Rights of Third Parties (Art. 1843 C.C)

Merger does not affect the rights of third parties who have an interest in the debt (e.g., usufruct right or pledge on the credit). These rights are protected to avoid negative "externality effects" of merger.

Example: Ato Yidnekachew is a creditor of his son, Ato Zinabu, for Birr 1,000,000. Kemal is entitled to get the interest of Zinabu's debt due to another transaction with Ato Yidnekachew. If Ato Yidnekachew dies and Zinabu succeeds him, the Birr 1,000,000 obligation extinguishes by merger. However, Kemal's right to the interest is *not* extinguished by this merger.

End of Merger and Revival of Obligation (Art. 1844 C.C)

A peculiar characteristic of merger is that an obligation extinguished by it can revive if the merger itself comes to an end.

Example 1: Misganaw borrowed Birr 50,000 from his father, Ato Alebachew. Ato Alebachew disappears, and his absence is declared by court. Misganaw, as the only successor, becomes the owner of his father's property, and his obligation is extinguished by merger. If Ato Alebachew returns after 3 years, the merger ends, and Misganaw's obligation to pay Birr 50,000 revives.

Example 2: Company X lent Company Y Birr 2,000,000. If the two companies merge into one, the debt extinguishes. If they later split back to their original separate entities, the obligation revives on Company Y.

Discussion: When merger ends, the period of limitation for the revived obligation generally resumes from the point it was interrupted by the merger, or a new period might begin depending on the specific circumstances and the nature of the interruption/revival event.

8. Limitation of Action

Limitation of action, also known as prescription, is a legal principle that bars legal claims after a specified period, leading to the extinction of the right to enforce an obligation. It promotes security, avoids evidentiary problems, and discourages dormant claims.

Principle of Period of Limitation (Art. 1845 C.C)

Unless otherwise specified by law, actions for performance of a contract, actions based on non-performance (e.g., damages, cancellation, forced performance), and actions for invalidation of a contract are barred if not brought within ten years.

Limitation of Right vs. Limitation of Action

Limitation of Right: Absolutely extinguishes the right itself.
Limitation of Action: Extinguishes only the right to bring a court action. Ethiopian law primarily limits *action*, not the underlying right, as evidenced by provisions like Art. 1850 (pledge example).

Beginning & Calculation of Period of Limitation

Beginning of Period (Art. 1846): The period runs from the day the obligation is due or the right under the contract could be exercised. For conditional rights, it runs from the fulfillment of the condition.
Annuities (Art. 1847): For annuities, the period runs from the day the first payment not made was due. This means if the first payment is missed, all subsequent payments may also be barred after ten years from that first missed payment's due date.
Calculation (Art. 1848): The period runs from the day the obligation is due (excluding that day) and is effective upon the expiry of the last day. If the last day is a holiday, it is debarred on the next working day.

Effect on Collateral Obligations

Collateral Claims Barred (Art. 1849): As a general rule, interests and other collateral claims (like surety, mortgage) are barred when the principal claim is barred by the period of limitation.
Pledge Exception (Art. 1850): A significant exception exists for pledges. A creditor whose claim is secured by a pledge can still exercise their rights on the pledged property, even if the principal claim is barred by limitation.

Example: Ejigu borrowed Birr 5000 with 2% interest, due in one year. Two years later, Belay pledged his car, and Wasihun became a guarantor. After 11 years from the due date (10 years of limitation + 1 year for due date), Ejigu's right to reclaim the debt is barred. Consequently, the claims against the surety (Wasihun) and any mortgage would also be barred. However, Ejigu *can* still exercise his right on the pledged car (Belay's car) due to the exception in Art. 1850.

Interruption of Period of Limitation

The running of the period of limitation can be interrupted by specific actions:

Debtor's Admission (Art. 1851 (a)): When the debtor admits the claim, particularly by paying interest or installments, or by providing a pledge or guarantee.
Creditor's Action (Art. 1851 (b)): When the creditor brings an action for the debtor to discharge their obligations. This includes court actions, and merely serving notice to the debtor is sufficient, even if not brought to a competent court.

Effect of Interruption (Art. 1852 C.C)

A new period of limitation begins to run upon each interruption.
This new period is ten years if the debt has been admitted in writing or established by a judgment.

Example: If Abraham did not require performance for 9 years, but then asks for performance or puts the debtor in default, a new 10-year period of limitation starts. He can then require performance again within 10 years from that interruption, effectively extending the total period to 19 years from the contract's formation.

Court Discretion & Waiver of Limitation

Special Relationship (Art. 1853 (1)): The court may set aside a plea of limitation if the creditor failed to exercise their right due to obedience or fear of the debtor with whom they have a special relationship (e.g., family, employer-employee). However, third parties who guaranteed the debt are released (Art. 1853 (2)).
Bad Faith (Art. 1854): The beneficiary of the period of limitation can raise it even if it is contrary to good faith.
Contrary Provisions (Art. 1855): Parties cannot waive limitation in advance by agreement, nor can they fix periods of limitation other than those fixed by law.
Waiving Limitation (Art. 1856): Limitation can be waived after it has become effective. Failure to raise the defense of limitation is considered a waiver. The court will not consider the period of limitation unless it is pleaded.

Discussion: Article 1810 states "No contract shall be invalidated unless an action to this effect is brought within two years," which suggests the court might prevent invalidation *sua sponte*. This appears to contradict Art. 1856, which states the court shall not regard limitation unless pleaded. This is a point of legal debate regarding whether the court has an inherent duty to apply the 2-year bar for invalidation even if not raised by a party, given the strong wording of Art. 1810.

Chapter Summary: Ways Obligations Extinguish

Performance: Obligations extinguish when performed according to the agreement and law.
Invalidation: Occurs due to defects in contract formation (e.g., capacity, consent), with retrospective effect and restitution.
Cancellation: Occurs due to non-performance, with retrospective effect, restitution, and potential expectation damages.
Termination: Ceases obligations prospectively from the time of termination, unlike invalidation/cancellation. Can be bilateral, unilateral, or judicial.
Remission of Debt: Voluntary release of debtor by creditor; accepted by debtor's non-objection.
Novation: Substitution of an existing obligation with a new one differing in nature or object, extinguishing the original and its accessories (unless specified).
Set-off: Extinguishes reciprocal debts to the extent of the lesser amount, under specific conditions (money/fungible, liquidated, due) and with certain exceptions (e.g., maintenance, state debts, unjustly deprived items, deposited items). Limited by third-party rights.
Merger: Obligation extinguishes when creditor and debtor become the same person. Does not affect third-party rights and can revive if merger ends.
Limitation of Action: Bars the right to enforce a contract after a specified period (typically 10 years), preventing enforcement by the creditor. Can be interrupted, and generally must be pleaded by the debtor.

Each method has unique impacts on contractual relationships and enforceability.

Review Questions

What are the differences between cancellation, invalidation and termination?
Ato Belay and one minor child enter into a contract. In the contract the minor child has sold his motorbike. Late Ato Belay sold it to Ato Behailu and the tutor minor wanted to have the contract invalidated. Can he invalidate the contract and get back his motorbike?
Bahre PLC owes Mesebo cement factory 1,000,000 birr and on another transaction Mesebo cement Factory owes Bahre PLC 1,000,000. Bahre PLC has bought a bus on loan from Mesfin industrial engineering for, 1000, 000. Unfortunately, the PLC is declared bankrupt and consequently Mesebo cement factory wanted to effect set-off. What would be your advice for Mesfin industrial engineering if you were the organization’s legal advisor?

An Interactive Guide to Extinction of Obligations: Ethiopian Contract Law