06 March 2012 Written by  Mesganaw Kifelew and Demelash Shiferaw

The purpose and scope of contract law


Though the questions ‘what is contract?’ and “what is contract law?” are of paramount importance, it is difficult to give a definitive answer to either. But one may say contract law is most obviously the law relating to agreements or promises. It is primarily concerned with agreements in which one party, or each party, gives an undertaking or promise to the other. It governs such questions as which agreements the law will enforce, what obligations are imposed by the agreement in question and what remedies are available if the obligations are not performed. Thus contract law is the law based on liability for breach of promises. However, ‘Contract law’ is also used to mean the whole collections of rules, which apply to contracts, and these includes many rules, which are not contractual in the sense of being based on a promise to do something. For example, if one party induces the other to enter a contract by fraud or misrepresentation, the innocent party may avail himself of certain remedies based on the rules of misrepresentation (fraud). There are certain conceptual differences on whether such rules are part of contract law or tort.

Contract law is primarily concerned with supporting the social institution of exchange. However, it is not as broad as the institution itself. An enormous proportion of our life is carried on the basis of exchanges that are in some sense agreements, but many of them are not governed by what is usually thought as contract law. Some agreements, such as domestic arrangements, are not governed by law at all.

What is a contract? In Anglo-American legal systems defines contract as a promises or set of promises for the breach of which the law gives a remedy or the performance of which the law recognizes in some way as a duty.  However, not all promises give rise to contracts. For instance, if you agreed to keep the house tidy while your parents are away on holiday you would not expect to find yourself in the court of law being sued for the breach of contract if you failed to do so. So, what kind of agreements does the law recognize as creating enforceable   rights and duties?  To answer this, we need to look in the rules of each legal system, which provide their own specific definitions of the term contract and its elements. For instance, the French civil code defines contract in article 1101 as an agreement to establish, vary, and extinguish rights and obligations of the parties. When we come to the Ethiopian legal system, we find the definition of contracts (enforceable agreements) under Article 1675 of the Ethiopian Civil Code. As such contract is defined as;

‘’An agreement whereby two or more persons as between themselves create, vary or extinguish obligation of proprietary nature’’.

This definitional article plus Article 1678 on elements of contract tell as in general the type of agreements enforceable by the law of contract in Ethiopian legal system. In the next chapters, you will study the details.

Purpose of the contract law

Contract law is primarily concerned with supporting institutions of exchange, which is an enormous part of our life carried on the basis of that are in some sense termed as agreement. Contract law has many purposes but the central one is to support and control the millions of agreements that collectively make up the market economy, and hence operates in the context of dispute resolution mechanism. Besides it empowers the parties to make agreements that the law will enforce. It also enables parties to the contract to make exchanges that might otherwise carry too great risk whether of disruption by some contingencies or default by the other party. Accordingly, contract law in this respect is the most important which creates smooth functioning of business transaction by creating certainty, predictability, and enforceability.

In this context, it is also important to note the different approaches to contract law determine its role. In the nineteenth century, at least in common law legal systems, the courts seemed to place great emphasis on freedom of contract. During this period the courts tended to reduce the numbers of rules controlling contract power. They see the role of contract law as enforcing the agreement of the parties. There are still writers who suggest that the law should enforce any agreement which was ‘freely made’ between the parties provided it has no adverse effect on others. These “libertarians” see the individual as the best judge of his or her own interest and consider that what was freely agreed is by definition, fair. Any attempt to use contract law to influence substantive outcomes (e.g. to try to produce a fairer distribution of wealth in society, or even to maintain the previous distribution) is both illegitimate and misguided.

Others take a less extreme position. They agree that individuals should be free to pursue their own self-interest but they recognize that in some cases ‘the market’ may not operate efficiently. For example, in cases where there is some kind of monopoly or where one party does not fully understand the contract, the law may need to intervene. Many such writers would say the contract law, whether we like it or not, does affect the distribution of wealth in society and that this should be recognized. A few writers go further and argue that it is no longer adequate to describe the law of contract as primarily concerned with supporting voluntary exchange in the market and correcting occasional abuses or market failures. In their view another transformation has taken place and the modern law’s prime concern is with controlling domination and promoting fair exchange and co-operation. When you deal Ethiopian law of contract, you need to assess which approach is adopted in the Ethiopian legal system.

Scope of Contract Law

The scope of contract law varies from country to country and from legal system to legal systems depending on the types of obligations they govern. Unlike non- contractual obligations in which a person undertakes an obligation not to wrong another by conduct that the law of tort establishes as wrongful, contract law governs contractual obligations which arises from agreements made between two or more persons which puts the promisor under the obligation to perform his or her promises under the sanction of an action against him for breach of the contract.

A contractual obligation implies the existence of an ‘obligor’-the person who is legally under the obligation and the ‘obligee’ for whose benefit the obligation exists. This feature of contract distinguishes contract law from criminal law obligations.

Moreover, contract law may have a general or special application depending on the nature and origin of contractual undertakings at a given time. Therefore, based on the scope of application of contract law contract laws may be dissected in to two areas of applicability complementing each other. For instance, article 1676(1) of the Ethiopian civil code stipulated the application or scope of general contract to apply to contracts regardless of the nature thereof and the parties thereto. Thus, the general rules of contract law apply to all contracts. However, the provision also recognizes that special provisions, as laid down in Book V of the Civil Code and the Commercial Code, may be applicable to certain contracts. The law also stipulates that the relevant provision of the Civil Code, Book IV title XII, shall apply to obligations notwithstanding that they do not arise out of contract. Accordingly, contract law may be applicable to extra-contractual obligations, unlawful enrichment obligation and so on. However, the scope of application of this law does not affect the special provisions applicable to certain obligations by reason of their origin or nature (Art. 1677(2)).

Last modified on Wednesday, 02 May 2012 13:05