07 March 2012 Written by  Balew Mersha and Kahsay Debesu

Extinction of Obligations

 

An already formed contract creates obligation of proprietary nature among the contracting parties. These obligations rarely exist forever without being extinguished. Sometimes after the formation of the contract, the contractually created obligations extinguish because of different reasons.

 

Having appreciated the formation and effect of contract, it is worth discussing extinction of obligation. Extinction of obligation connotes the stoppage of already existing obligation. In light of this, this chapter deals with the grounds on which on already created obligation is extinguished.

 

In so doing, the ways by which obligation extinguishes will be discussed in a detailed manner. According to Article 1806 of the Civil Code (C.C), there are different grounds which cause extinction of obligation. Cumulative reading of Articles 1806 and 1807 of the C.C takes performance, invalidation, cancellation, termination, novation, set off, period of limitation of a contract, and merger as grounds of extinction of obligation. Each way of extinction of obligation has been, accordingly, discussed in different sections.

 

While discussing the grounds of extinction, their meaning, the difference among them and with other ambiguous terms, effect on the contractants and third parties, effect on the main obligation and on the collateral obligation will be discussed.

 

 

Performance of contract

 

Performance of obligation is not only an effect of contract but also a ground of extinction of obligation. Performance of the contract shall however be made according to the terms of the contract and mandatory provisions of the law if it shall extinguish contractual obligation. It shall be performed according to the agreement without discrepancy if it shall bring the contractual obligation to an end.
If someone agrees to deliver his Mercedes car but actually delivered a vitara, the obligation is not extinguished. Extinction of obligation by performance of a contract needs performance of a contract in a legally required conformity.

Invalidation and cancellation of a contract

 

Invalidation of contract is one means by which contractual obligations are extinguised. Invalidation of a contract happens when there is defect in the formation of the contract. If a party that is incapable concludes a contract or if one of the parties concludes the contract without having the legally required consent, the contract is subjected to rescission. Hence, what do you think the difference in grounds and effect of  invalidation and cancellation of contracts?

 

 

This title discusses invalidation and cancellation as one mechanism by which obligation extinguishes. The discussion in invalidation and cancellation covers the meaning, grounds, entitled parties, time limitation,and effect of invalidation and cancellation. The party, which is entitled to invalidate the contract along with other rights and duties of the party, has been dealt with.

 

It has incorporated the effect of invalidation and cancellation when the whole contract and part of the contract is invalid and its effect on third parties whose right might be affected by the effect of invalidation and cancellation. It also includes issues with reference to the position of Ethiopian law of contract towards void and voidable contracts.

 

Invalidation means making an effective contract ineffective when it has a problem in its formation. Invalidation is related with the problem in the formation of the contract. Invalidation comes into question when one of the parties wants to be free from the contractual obligation owing to a problem in the formation of the contract.

 

Therefore the mere presence of willingness of one party to have a contract invalidated is not enough. In addition to that, the legally provided grounds shall also be fulfilled. Lack of capacity and lack of sustainable consent are among the grounds that render a contract invalid.

 

The nature of invalidation of a contract is reflected in its effect. Now that invalidation of contract takes us to the conclusion that the contract is not properly formed, the effect of contract is said to be restitution. The contracting parties are put to the place where they were before the formation of the contract.

 

Sometimes compensation might be ordered when a contract is invalidated. This might lead us to the conclusion that the effect of invalidation and cancellation is the same in compensation. However, the damage following from an invalidation of a contract shall aim at putting the contracting parties in a place they would have been had the contract not been formed.

 

Cancellation on the other hand is making a contract ineffective when there is non-performance. Cancellation of a contract is one effect of contract in that the contract is formed within the legally provided requirements. When one of the contracting parties fails to perform a contract the other party might cancel the contract as one remedy of non-performance of the contract. There might be again other grounds of cancellation like the condition which results in cancellation.

 

The other basic difference between invalidation and cancellation is their ground. The ground for invalidation is defect in its formation while the ground for cancellation is non-performance. This does not, however, mean that the only difference is in their ground. They are also different in their effect. Eventhough the effect of both invalidation and cancellation is restitution, cancellation additionally entitles the party a compensation that rewards the benefit of contract.

 

Unless the invalid contract is invalidated, the contract is upheld and becomes effective. Eventhough the contract might not be performed, the remedies of non-performance will be due. Under Ethiopian law of contract anybody that wants it to be invalidated cannot invalidate a defective contract. It shall be the party who is affected by the invalid contract that can invalidate the contract. Article 1808 (1) of C.C is provided to this effect stating in its wording:

 

“A contract which is affected by a defect in consent or by the incapacity of one party may only be invalidated at the request of that party”

 

The basic reason to entitle the party that is affected by the invalid contract the power of invalidating the contract is to protect the interest of that party. The other party whose consent is not affected or who is not incapable is considered to have full information or rationality behavior. Unless he suffers from information asymmetry or was irrational at the time of the formation of the contract there is no reason to help him by empowering him to invalidate the contract.

 

This does not, however, mean that no one other than the party who is affected by the contract can invalidate the contract. Representative of a party who gave his consent either by defect in consent or under incapacity can invalidate the contract. Representatives of the party, that is potential to be adversely affected by the invalid contract might be in a position of enforcing the rights of the party. If for example a minor enters into a contract, the minor may not necessarily invalidate the contract by himself. His tutor can invalidate it, as his tutor is his legal representative.

 

In sub-Article two of this provision, however, any party is entitled to invalidate an invalid contract in the definition of this provision. Article 1808 sub Article (2) connotes that “A contract whose object is unlawful or immoral or a contract not made in the prescribed form may be invalidated at the request of any contracting party or interested third party”.  This provision is not clear in its position as to a contract whose object is not sufficiently defined and whose object is impossible. Whether such contract is included under this provision is a gap to be filled by interpretation.

 

When we generally observe the sprit of the provisions, contracts whose object is not sufficiently defined, impossible and which are not in a prescribed form seems to be incorporated by analogical interpretation. In spite of the fact that sub Article (1) of the provision does not include a contract which is defective owing to the aforementioned grounds, its exclusion does not mean that such contracts are valid.

 

If such contracts are not valid the effect of a contract whose object is invalid or immoral is the same with the effect of contract whose object is not sufficiently defined, made in a prescribed form, and whose object is not possible. Articles 1714 (1), 1715(2), 1716(2) and 1720(1) clearly show that the above mentioned grounds shall render the contract ineffective.

 

Capacity and consent do not, however, render a contract ineffective. These grounds rather entitle one of the parties the power either to invalidate the contract or give it effect. Therefore since the grounds provided underArticles 1714 (1), 1715(2), 1716(2) and 1720(1) are similar in rendering the contract defective, it is advisable that Art.1808 (2) shall include a contract whose object is not sufficiently defined, and not possible by analogical interpretation with all the criticisms.

 

In addition to insufficient coverage, the provision seems to connote that void contracts are subjected to invalidation as the phrase “… may be invalidated at the request of any contracting or any interested party…” is put to that effect. Its being under the title of extinction of obligation, along with this provision also leads to the conclusion that unless void contract is invalidated, the obligation created is not extinguished. Eventhough this seems a logical conclusion which takes its premises from the title of Chapter 3 and Article 1808 (2), giving effect to an illegal or immoral contract is not only absurd but also in contrary with 1714 (1), 1715(2), 1716(2) and 1720(1) of the Civil code which shows that such contract shall be of no effect.

 

However, the concept of invalidation depicts making a potentially effective contract ineffective. A contract, which is not invalidated, is required to have effect like any other contract. It is this effect of invalid contract that begs its invalidation to make it ineffective and correct the error it imposes on contractants. If the contract is void, however, it does not have legal effect from the very beginning.

 

Provisions that cover the requirements whose absence renders a contract void vividly shows the ineffective nature of such a contract.  Under Article 1714- it has been vividly stated that the contract shall be of no effect by law not by invalidation if “the obligation of the parties or one of them cannot be ascertained with sufficient precision.”

 

Article 1715 again renders a contract, whose object is impossible absolutely and insuperably ineffective. Similar connotations have been incorporated in Articles 1716, 1717 and these provisions in effect show that the contract is no more effective.

 

Noncompliance of formal requirements also renders a contract void or ineffective. We can infer this from Article 1720 in that a contract which is not made in the prescribed form is not a contract; it is rather a mere draft. From this inferred conclusion it is not illogical to infer that a contract, which is not made in a prescribed form does not have legal effect. For someone’s amusement this provision even says that it is not a contract but rather a mere draft. Invalidating an agreement which is not contract seems to be absurd.

 

Having the above affirmation in mind, Article 1808 seems to be in contradiction with the very nature of invalidation that is rendering a contract ineffective and with the provisions, which deal with the effect of noncompliance of the requirements. This provision is also on the grounds of extinction of obligation. Invalidation of a contract is one of the grounds. Unless a contract, which shall be invalidated, is not invalidated, the obligations created are not extinguished in the absence of other grounds. It is questionable if this is true for a contract whose object is undefined, unlawful, immoral or impossible. From the very beginning no legal obligation is created under such contracts

 

If it does not have legal effect there is no need to have such agreement invalidated. There is not any created obligation to be extinguished by invalidation. Such nature of void contract casts doubt if invalidation of such contract really extinguish obligation as void contracts do not create effective obligation as it has been seen before. Be that as it may the invalidation of contracts which have no effect by the function of law, has been put under the extinction of obligation by invalidation.

 

An invalid contract can result in the extinction of contract eventhough it is not invalidated. Notwithstanding the fact that a contract is invalid, the reaction of contracting parties to a contract is not necessarily invalidation. Contractants can also resort to other options like refusing performance without having the contract invalidated.

 

Article 1809 denotes that a party entitled to invalidate a contract can refuse performance at any time. The contracting party can extinguish the obligation by refusing performance of a contract. Albeit the absence of the act of invalidation the obligation will thereby be extinguished. The right to refuse performance seems, however, to be made at any time without any prescription.

 

The right to invalidate a contract is, however, limited by lapse of a certain period of time. Article 1810 connotes that a contract shall not be invalidated unless an action to this effect is brought within two years from disappearance of the ground for invalidation. This provision seems to be prohibiting invalidation even if the period of limitation is not raised, as it says, “… no contract shall be invalidated.”

 

It is consequently doubtful if the court can on its own motion prevent invalidation when it is cognizant of the lapse of time although prescription is preliminary objection which shall be raised at the possible early stage. The question whether the period of limitation is not preliminary objection in the aforementioned case casts perplex doubt as substantive law has overriding importance over procedural matters and the procedural laws refer to the substantive laws to determine whether certain objection is preliminary objection or not.

 

The time from which two years is counted starts from the disappearance of the ground for invalidation excepting unconscionable contract for which the starting point is the formation of the contract. If the ground for invalidation is a mistake, two years from the knowledge of the misperception or erroneous understanding, if the ground is duress, two years from the avoidance of the threat, and if the ground is incapacity from the time the incapable becomes capable are the points where counting starts.

 

Assume that a 15 year old boy enters into a contract. He can invalidate the contract within two years after he attains the age of 18. He can invalidate it within five years from the formation of the contract in this specific case.

 

The beginning for the two years of the period of limitation is different when the ground is unconscionable nature of contract. Article 1810 (2) says in its wording as:

 

Where a contract is unconscionable and the party injured is of age, the action shall be brought within two years from the making of the contract.

 

The point from which we count the time is not the time at which the ground disappears but the time of formation of the contract.

 

The presence of invalid contract does not necessarily mean that the contract will be invalidated and the obligation will be extinguished. There are circumstances where the contract is upheld. Confirmation by the injured party is one among the circumstances. Article 1811 indicates “the party whose consent was vitiated may waive his right to require invalidation where the cause which vitiated his consent disappeared.”

 

The confirmation can set free the contract from invalidation if the confirmation was made after the cause which vitiated the consent disappeared. The 15 year old boy can confirm the contract and avoid invalidation after he attains 18 years old.

 

If the invalid contract due to defect in consent was made in special form, confirmation shall also be in special form so that the confirmation is to be valid. A contract for the formation of which form is a mandatory requirement shall also be confirmed in the same form.

 

Eventhough an invalid contract can be confirmed by the injured party, there are certain circumstances where the contracting party of the injured party may make the contract effective even against the will of the injured party. Where the invalidity is owing to unconscionable nature of the contract, the other party against whose will invalidation is required can put the action to an end by making good the injury pursuant to Article 1812.

 

Art.1812. Putting an end to action.

Where a party requires the invalidation of an unconscionable contract, the other party may put an end to the action by offering to make good the injury.

 

The connotation enshrined here is that once the element of unconscionable nature of a contract that is unfair consideration is made good, the contract shall be effective. Amendment of a contract as effect of invalid contract is also connoted under this provision.

 

The presence of grounds for invalidation does not necessarily imply complete invalidation of the contract. When only part of the contract is invalidated, only that part is invalidated provided that such invalidation does not affect the essence of the contract.

 

The party who has the right to invalidation is imposed with certain obligation aimed at protecting certainty as to the fate of the contract. Article 1814 entitles a party whose contract can be invalidated to require if his contractant intends to confirm or cancel or invalidate a contract. When such inquiry is forwarded for the party with the right of invalidation or cancellation, he is duty bound to respond. If the party fails to respond, the contract is presumed to have been invalidated. Failure to respond gives the other party the right to make a contract ineffective.

 

When an obligation of a contract extinguishes owing to invalidation and cancellation there are certain effects which are worth discussing. For the most part, the effect of invalidation and cancellation of contract is extinction of a contract. After a contract is invalidated or cancelled the obligations created by the invalidated or cancelled contract disappears. There is no more contractual obligation to be discharged.

 

Extinction of contractual obligation does not however mean that there is not any obligation left to be carried out by the obligation. If one of the parties or both have discharged their obligations, invalidation or cancellation will create obligation of effecting restitution.

 

Article 1815 is provided with this implication as:

Art.1815__ effect of invalidation or cancellation

(1) Where a contract is invalidated or cancelled, the parties shall as far as possible be reinstated in the position which would have been existed, had the contract not been made.

(2) Acts done in performance of the contract shall be of no effect.

 

From the above Article do you think the effect of invalidation and cancellation are the same? If not what are the differences and the rational behind it?

 

According to sub Article (1), the parties are required to be put in their original position before the formation of the contract. The parties are expected to be with their original properties before the contract. After the formation of the contract the parties are put in different position because of the newly created obligation. All or part of the obligations might have been performed.  If invalidation or cancellation happens the parties are put in their previous position in that the performed obligations are reinstated.

 

Sub Article (2) confirms the above assertion putting specific effect. Any party who has performed can invalidate the performance. Someone who has given something to discharge his obligation can reclaim the thing given. A party who has given a car in consideration of price shall give back the car and take back his money.

 

A question as to whether cancellation and invalidation are the same, excepting a titular difference, may be raised if the effect of both is reinstatement under the law of contract of Ethiopia. Although cancellation might be followed by compensation, invalidation can also be followed by compensation according to Article 1817 (2), as it shows that payment of compensation shall be made for parties to reinstate them.

 

However, difference still exists in their effect as cancellation paves the way for compensation that puts the victim in the place he would have been had the contract been performed. Article 1790 (1) shows that damage shall be made good for injury of non-performance of contract. When the reason of damage is non-performance perfect expectation damage is understood. The possibility of forced performance and damage together strengthens the inclusion of perfect expectation damage.

 

Invalidation is, on the other hand, followed by compensation that puts the victim in his original position. Such effect also exists in Ethiopian law of contract pursuant to Article 1817 which shows that the compensation shall be aimed at reinstating the party in his original position. Eventhough this provision is equally applicable to cancellation, cancellation can also be followed by additional damage pursuant to Article 1790.

 

The reinstatement effect of invalidation and cancellation is not made without limitation in a way it hinders security of transaction in parties which have no and are not expected to have information about the cancellation or invalidation. An act that is made in performance of a contract is not subjected to invalidation if such invalidation affects the interest of third parties. Article 1816, which protects the right of third parties, aims at the said purpose saying:

Art.__ Rights of third parties.

Acts done in performance of a contract shall not be invalidated where the interest of third parties in good faith requires.

 

Some discussion as to who can be a party in good faith is necessary here. A party who does not know the invalid nature of a contract or about the cancellation of the contract whose invalidation or cancellation would affect his interest is in good faith. A party who is not reasonably expected to know is also in good faith.

 

If Mr.  Habtamu bought a car from Mrs. Meselech and Mrs. Meselech previously has the car on account of invalid contract with Ayalew, Mr. Ayalew cannot invalidate the contract unless Mr. Habtamu is proved to know the invalid nature of the contract between W/ro Meselech and Mr. Ayalew.

 

Impossibility of restoring to the previous position is also another limitation on the reinstatement effect of invalidation and cancellation. Thorough reading of Article 1817 states that acts done in performance of the contract shall be upheld if there is impossibility, serious disadvantage or inconvenience of invalidation to cause to one or both parties.

 

Someonewho has bought bricks on account of invalid contract and used the brick in building may refuse reinstatement since reinstatement creates serious disadvantage, inconvenience. It is even impossible to take the bricks back as they were.  Sub Article (2) has provided a solution to alleviate the inconvenience by monetary compensation or any other remedy which the court thinks fit.

 

Restoring to their position pursuant to Article 1818 has been ordered to be applied referring to unlawful enrichment. Someonewho has bought a small house on account of invalid contract may construct another house. If restitution is ordered, the party may require payment for the additionally constructed house in accordance to unlawful enrichment.

Last modified on Tuesday, 12 June 2012 23:45