Law

of
Security
 Law of Security Devices
Introduction
 The law of security devices is one of the sets of laws,
rules and principles, formulated to regulate and foster
the smooth running of business transactions.
 It governs the relation b/n creditors and debtors, re-
garding the performance of various obligations, with a
special focus on the credit/loan system.
 The grand objective of law of security device is to facili-
tate the smooth running of commercial transactions.
 Intro Cont. ….
In the strict sense of the term ‘’security’’ refers
to either personal security(surety) or property
securities - pledge and mortgage.
In the broad sense of the term ‘’Antichresis –
special type of mortgage, lien rights, rights of
redemption also possess the nature of securities.
Since security devices are based on special con-
tracts, the general principles and provisions of
contract in general are applicable.
 Chapter One: Introduction
1.1 Definition of securities
According to Blacks law dictionary, security is:
 1) Collateral given or pledged to guarantee
the fulfillment of an obligation, esp, the assur-
ance that a creditor will be repaid.
 2) A person who is bound by some type of
guaranty – surety (who is primarily liable for the
payment of another’s obligation).
 Intro. cont. ….
M. Planiol: ‘’security contracts” as:- “those con-
tracts intended to protect creditor against the in-
solvency of the debtor. ”
Points from the above definitions:-
Security is an undertaking to assure/guarantee the
creditor that the debt will be paid or the obligation will
be performed.
It is also providing the creditor with alternative rem-
edy in case the debtor fails to fulfill his obligation.
 Intro. cont. ….
Security is created principally for the benefit of
the creditor, however, the debtor also may be con-
sidered to have at least indirect benefit (e.g get-
ting loan easily).
Security arise, most of the time, from contract
b/n the creditor and the debtor or 3rd party.
Security can exist only if there is a debt to be
paid or obligation to be performed.
 1.2 Importance of Securities
Security mechanisms are designed to facilitate
the relations b/n creditor and debtor.
Securities play a great role in smoothening the
relation b/n creditor and debtor – how?
It assures the creditor that the debtor will pay
or discharge his obligation.
This substantially reduces, if not avoid, the
possible damage and inconveniences due to
non-performance by the debtor. But how?
 Cont…
Securities have also importance for the debtor
and even the society in general.
For the debtor, the debtor who offers security
will have better access to loan than a debtor
who requests a credit without offering any secu-
rity.
For the societies, business activities specially
in developing countries are financed through
loan system. It assists business activities.
 1.3 Nature of Securities
The most important distinguishing character of se-
curities is that securities by their nature are acces-
sory or secondary rights.
Accessory rights: are those rights the existence of
which is dependent upon valid existence of another
rights referred to as primary rights.
Principal/primary rights: are rights enforceable by
themselves independently while the enforceability of
accessory rights depend on the failure to enforce the
principal rights.
 Cont...
Security rights are accessory or an alternative remedy for
the creditor that cannot exist or cannot be enforced in the
absence of principal rights/ obligations.
The accessory nature of securities can be seen from:
1st – without valid obligation, no securities can exist.
2nd – the enforcement of securities is conditioned up on
the failure of the debtor to discharge his obligation (en-
forced only after ascertaining the failure of the debtor).
Hence, securities stay inactive until the due date of the
secured obligation.
 Cont….
3rdly, if the primary obligation is extinguished for whatso-
ever reason, it automatically results in the extinction of
securities.
In conclusion:
The creation of securities presumes the existence of a
valid obligation w/c the creditor expects to be performed;
The execution of securities presumes the failure of the
debtor to discharge his obligation;
A reason w/c brings about extinction of primary obliga-
tion at the same time result in the extinction of securities;
but the reverse may not be true.
 1.4 Types of Securities
• Securities are classified into different forms in different le-
gal systems.
• There are two types of securities in our legal system: 1)
Personal security
2) Real (property)
1) Personal security:- is also referred to a surety.
• The security right of the creditor is against human person
called guarantor- who undertakes towards the creditor, to
perform the primary obligation in case the debtor fails to
perform it. .
• Personal security (surety) is a part of contracts in general
(1920-1952).
• Surety is one of the simplest & actively working type of se-
curity in day to day business transaction.
 Cont. …
2. Real(Property) Security- the security right of the credi-
tor is enforced against property or a thing.
• Real securities are classified in to two:-
1) Pledge
2) Mortgage
1. Pledge: - is security against movable which is referred to
as pledge in many legal systems and also called as pawn,
bailment etc. in other legal systems.
2. Mortgage:- the security is created against immovable
principally & special moveables.
 It is called mortgage in most of legal systems or known
in another form of security i.e. Antichresis, .
 Cont. …
• Antichresis, is a special type of mortgage.
• But there are also other types of rights which
may be considered as securities.
• The principal examples of such rights may be-
Lien rights, Sale with ownership reserved,
Rights of redemption and others.
 Chapter Two:- Pledge
(Security on movables)

2.1 Definition of pledge

There is a varying understanding & def’n of
the term pledge…..
For one legal system pledge is simply a spe-
cial type of bailment, while it is a lien right for
the others.
 Def. cont. …

Black’s law Dictionary 8th ed(2004)

• Pledge is ‘’a security interest in personal
property represented by an indispensable in-
strument, the interest being created by a bail-
ment or other deposit of personal property
for the purpose of securing the payment of
debt or the performance of some other
duty’’
M. Planiol, Treatise on civil law,(1939)
• “Pledge is a contract by which the debtor himself
or a third person remits to the creditor a movable
object to serve him as security.
 Def. cont. …
Art 2825 of the Eth Civil Code defines pledge:-
“A contract of pledge is a contract where by a
debtor undertakes to deliver a thing called
pledge to his creditor as security for perfor-
mance of an obligation.”
What are the main elements of the above
definition?? Contract of pledge is:- (a) a con-
tract, (b) the debtor (c) undertakes to deliver
(d) a thing (e) to his creditor (f) as security for
performance of an obligation.
 Def. cont. …

A. Pledge is a contract:-
•In our legal system, the only source of pledge
is contract.
•Pledge arises only from a clear agreement/
express contract b/n the parties.
•Hence, the only source of pledge is contract.
(See Illustrations)- (See arts. 2845(1) and
2858(2)
 Def. cont. …

B.…..the debtor…..:- Who can be a pledger?

• The appropriate person to deliver the object is the
debtor.
• However, the pledged property may also be delivered
by either the debtor himself or a non-debtor 3rd party
on behalf of the debtor. (See art. 2826 C.C.).
C) …..undertakes to deliver ….
• The basic obligation to be assumed by the pledger: is
undertaking to deliver rather than actual delivery.
 Def. cont. …
• The actual delivery of the object(transfer of posses-
sion) is not precondition for the creation of pledge.
• Actual delivery and immediate transfer of possession
is not a requirement under the law. (See art. 2842).
D. ….a thing ……. What are the appropriate subject
matter of pledge?
• A thing refers to everything whether corporeal or in-
corporeal, movable or immovable, which can be ap-
propriated and put into economic use.
 Def. cont. …
• But in the law of pledge, it is only movable that can be
given as pledge.
• Movables, in its broad sense:- not to only movable ob-
jects but also to various forms of rights and claims on
movables.
Read Art 2829 & state its elements……..
E) …….to his creditor……: Who may be the possessor
of pledged property?
• In principle, the pledged property will be delivered to
the pledgee-creditor(considered as a lawful possessor)-
(see Art 2842(1).
 Def. cont. …
•But, in some exceptional situations, the pledged prop-
erty may be delivered to a 3rd party custodian (See art.
2831).
F) …………as a security for the performance of an obliga-
tion
•A contract of pledge is accessory to some principal
obligation.
•The only purpose of pledge is to secure the perfor-
mance of an obligation- which may be an existing/
present or future oblig’n(See art.2827).
 Def. cont. …
- In the Ethiopian context, cumulative reading of
arts. 2825, 2826, 2829 & 2831 can give us a bet-
ter definition of pledge:
- ‘’Contract of pledge is a contract where by a
debtor or a non- debtor third party undertakes
to deliver a movable thing called pledge to his
creditor or 3rd party custodians as the case may
be in order to secure the performance of an
obligation”. Writers def’n!!!
What do you think are additional elements sup-
plied to art. 2825 of the C.C.?
2.2 Formation Requirements of Contract of Pledge

1) Formality Requirements-
• A K of pledge is a K- thus subject to general re-
quirements of K.
• It is also a special type of K- hence has specific
requirements.
• Mandatory specific requ’ts:- Specification of
maximum claims and written form(art. 2828).
 Requ’t cont. …

• The nature & content of the secured primary obliga-

tion and the maximum part of such primary obliga-
tion which is secured by concluding the contract of
pledge should be specified.
Read good illustration given in your ref. material…..
 The second requirement፡- Written form
 If the max. amount guaranteed exceeds 500 birr, the
contract of pledge has to be supported by a written
document(art. 2828/2).
 Requ’t cont. …
2) Transfer of possession
•Is other important requirement for enforcing the
security right of the creditor.
•The requirement for transfer of possession:- de-
mands that the pledger has to be dispossessed of
the pledged property.
•The debtor should relinquish the possession of the
pledged property into the hands of the creditor or
any appropriate third party.
Why is transfer of possession important?
 Requ’t cont. …
• This is bcz of the legal presumption applicable to
the possessor of moveable things/property:- pre-
sumed to be an owner and can transfer the thing as
owner to a third party in good faith.
• Therefore, the creditor cannot claim to be a se-
cured creditor until such cond’n is fulfilled.
• Generally, the parties should not by their agreement,
exclude the transfer of possession.
• The possibility of the contract to be effective with
no transfer of possession- if provided only by law.
Consider art 2830 as an example of such law…….
 Requ’t cont. …
• This is when the thing subject to pledge cannot be
disposed of without a document of title and such
document of title has been delivered to the creditor-
E.g. bill of lading for goods shipped or voucher receipt
for goods warehoused.
• Q-Then when should the debtor be dispossessed of
the pledged property for the contract of pledge to be
valid or enforceable? (Read arts 2832, 2852)
• Under Art 2832: States parties not to exclude the
transfer of possession totally by stipulating that the
pledge remain with the debtor.
 Requ’t cont. …
• However, the law does not prohibit the transfer of
possession to be on certain day in the future after
conclusion of the contract of pledge(art.2852/2).
• A creditor who does not have possession of the
pledge cannot claim the enforcement of contract
of pledge.
• That is, have possession of the pledge on the day
you invoke the rights under contract of pledge- at
the time of maturity of right under K of pledge.
 Requ’t cont. …
• It is sufficient for the creditor if he can take possession
at any time before due date of his/her principal claim.
• Though a means of effective protection, actual delivery
and transfer of possession on the date of conclusion of
the contract of pledge is not a requirement.
• That is, it is not mandatory requirement to take posses-
sion on the date of conclusion of the pledge contract.
But what do you think is the disadv of the requ’t of trans-
fer of possession of the thing pledged?
2.3 Rights and Duties of the Parties to the Contract
of Pledge
Read arts. 2834ff of the CC:-
 All the rights of the pledgee give rise to duty for the
pledger and the rights of the pledger are duties for
the pledgee.
I. Rights and Duties of the Pledger:-
Rights of the pledger- Pledger, as an owner of the
pledge (pledged property), has certain rights like:-
a. Right to retain ownership(Art 2834)
b. Right to take back the pledged thing by discharg-
ing the secured obligation at any time (Art 2837)
 Rts & duties cont….
 The pledger retains full right of ownership on
the pledge and can exercise certain rights in-
herent to the right of ownership- such as dis-
pose the thing, give as security for another
debt(re-pledge), etc.
 That is, the debtor can create several pledges
on the same property- plurality of security.
 However, the disposition or re-pledging made
by the debtor (owner) should not affect the
security right of the creditor-rule of priority.
 Rts&dts cont….

 The other is the right to take back his property by

discharging the debt guaranteed at any time even
before the due date.
 This right is absolute as it cannot be restricted even
by agreement (art.2837).
 This right is principally based on 2 reasons:- acces-
sory nature of security rights (to ensure the payment
of the secured obligation) & based on the debtor’s
O/ship right to dispose the thing.
 Rts&dts cont….
Other rights of the pledger:-
 if the pledge is to be sold, the debtor (the
pledger) has a right to apply to the court for the
restriction of sale to the part of the property-
when the thing is divisible by its
nature(art.2855).
 Once the pledge is sold, the pledger has a right to
get any balance of the proceeds after the se-
cured creditor is paid sufficiently- b/c of right of
ownership(art.2859/2).
 Rts&dts cont….
Duties of Pledger:-
a) Duty to deliver the thing
 The first duty of the pledger is the duty to transfer
possession.
 Possession of the thing has to be transferred either
to the creditor or to a third party custodian .
 Dispossession of the pledger is necessary for the ef-
fective protection of security right of the creditor.
 Rts&dts cont….

b) Duty to cover cost of preservation(2835)

 The pledgee has an immediate possession of the
pledge & is expected to preserve the thing even by
incurring expenses.
 As an owner, the pledger shall reimburse the
pledgee for the cost of preservation reasonably in-
curred by the pledgee. But why so???
 For consequences of failurity to preserve, see
art.2836.
 Rts&dts cont….
2. Rights and Duties of the Pledgee
I. Rights of the pledgee
a. Right to possess the pledged property
 The pledgee creditor should take the possession of the
pledge & can demand enforcement of his security
right.
 As a lawful possessor, the creditor can bring even pos-
sessory action against any third party to protect his
possession (See arts. 1148, 1149 & 2842/1).
 Rts&dts cont….

b. The right to collect fruit (2841/1/:- This right of the

pledgee is b/c of:-
 His direct contribution to the production of fruits &
for the sake of practical convenience.
 So the pledgee is entitled to collect the fruit and en-
joy it as an owner- however the value of the fruits
collected will be used to settle the claims of the cred-
itor- cost of custody and preservation , interest , capi-
tal of the principal debt.
 Rts&dts cont….
c. Right to be paid first (Priority Right)- arts.
2857&58 vs. 2839(1)
is the principal right which is a real expression of
security right.
This right of priority exempts the secured creditor
from competition with other creditors & is not sub-
ject to the rule of proportional payments.
It is the right to be paid from the proceeds of sale
of a pledge prior to or in preference of other credi-
tors who claims payment from the same debtor.
 Rts&dts cont….
II. Duties of the Pledgee
a. The duty to preserve the thing (arts. 2835, 45, 47)
 Because of his right to possess the thing & physical
control…..with right of reimbursement.
 The pledgee is assimilated to a bailor in discharging
the duty to preserve the pledge (See arts. 2720, 21).
b. The duty not to use the thing (2840)
 The pledge is not as of right entitled to use the thing.
 His possession doesn’t give rise to the right to use the
thing except in 2 cases-
 Rts&dts cont….

 First, with the full consent and permission of

the pledge;
 second, if making use of the thing is necessary
for its preservation- See art. 2840.
c. The duty to return the thing upon extinction
of the secured obligation(2845(1) &49)
Discharging of the secured obligation results
in the extinction of pledge & duty to restore
the pledged thing to its owner.
 2.4. Execution of pledge - Sale of pledge
 Sale of pledge is the means to the execution of
the security right of the pledgee.
 After debtor’s failure to discharge the secured
obligation., the execution of a pledge takes
place through sale of the pledged property.
 Both the pledger and the pledgee have inter-
ests to be protected during the process of sale
of pledge.
 Therefore, the process of sale of pledge
should be reasonable and fair for both parties.
 Sale of pledge….
What are reasonable and fair rules during Sale of
Pledge?
A.In cases of ordinary creditors- {Arts. 2851,
2852, 2853/54/55/56 of the Civil Code.}
 The law principally aims at protecting the
pledger b/c of: his position(disadv.) & thing un-
der the possession of the pledgee.
 Sale of pledge….
i. What rules and procedures to be complied
in the process of the sale of pledged prop-
erty:-
 1st The pledgee is not entitled to undertake a
private sale of the thing;
 2nd he can cause the sale of pledge only by
court order or through a neutral third party,
if the thing has price quoted on market;
 3nd The pledgee can apply to the court for
the sale of thing only if it is under his pos-
session;
 Sale of pledge….
4th The pledgee has to ascertain, by giving de-
fault notice that the debtor has failed to dis-
charge his obligation;
5th he may be required to restrict the sale of
the pledge only to the part of the pledge
which can sufficiently satisfy his claim;
6th he has to hand over to the pledger any
amount of proceeds in excess of his secured
claim.
 Sale of pledge….

 Hence, breach of any of the above rules & pro-

cedures may bring liability on the pledgee &
payment of damages sustained by the pledger.
 Under the above rules, Our Civil Code has
adopted the concept of judicial foreclosure-
whereby the pledgee is entitled to enforce his
security rights only by court order and super-
vision.
 Sale of pledge….
B. In case the creditor is a bank – Special Protection
 The above stated rules and procedures are only appli-
cable on non-bank creditors.
 In cases where the creditor is a bank, there is a special
law which regulates the execution of security rights.
 Banks creditors are not expected to observe the rules
and the procedures under the Civil Code & regulated
by the special law applicable to banks.
 The special laws are Proclamation No. 97/1998,
98/1998 & 216/2000- proclamations issued to provide
for properties mortgaged or pledged with banks.
 Sale of pledge….
 Under these laws, the concept the power of sale
foreclosure is introduced.
 The power of sale foreclosure is the concept
whereby the creditor and the debtor are legally enti-
tled to conclude an agreement which entitles the
creditor to sale the property privately or to acquire
ownership of the property without a need to apply
to the court.
 Creditor banks are entitled to a special protection
whereby they are relieved from court procedure in
the execution of their security right.
 Sale of pledge….
 Creditor banks are given this special protection be-
cause of the practical problems they are facing in the
enforcement of securities.
 Therefore, banks are legally freed from the rules and
procedures which require creditors to apply to courts
for the enforcement of securities.
 But some scholars argue that:- Even prior to the com-
ing into force of the foreclosure proclamation of
Ethiopia, the civil code does not prohibit entering into
contracts for selling of pledged or mortgaged prop-
erties by complying with the formalities required by
law. Do you agree or not?
 Sale of pledge….
 However, foreclosure proclamation provides some
restrictions on the power of the mortgagee/
pledgee-banks in selling the pledged/mortgaged
property of ……
 The creditor bank is responsible for any damage
caused to the debtor if the debtor can show that the
creditor bank sold the property for an unreasonably
lower price which affects the interest of the debtor.
 For more details read the extracts provided in your
material…………
 Summary:- Foreclosure…. From extract…

 There are several mechanisms of realizing the secu-

rity of a loan:-
 Foreclosure and repossession are the most known
methods of liquidating……
 Foreclosure procedure is one of the mechanisms
used in a financial institution as a means of liquidat-
ing a security held in a bank when debtors fail to ef-
fect repayment of their loan.
 Globally, there are various foreclosure procedures
that are practiced by banks and financial institutions.
 Foreclosure….
1. Strict Foreclosure-
 “Which is a judicial procedure that by termi-
nating the mortgagor’s equity of redemption
gives the mortgagee absolute title to the
mortgaged real estate without a sale of the
property.’’
 The net effect of this procedure is to give
bank the ownership of the collateral without
any sale of the property.
 What do you think is a problem with this
procedure?
 Foreclosure….

2. Power of sale Foreclosure-

 “It is a foreclosure based on terms in a mort-
gage/pledge contract giving a mortgagee/
pledgee bank or third party the power to sell the
mortgaged property upon default without re-
sorting to judicial proceedings by foreclosure; by
an out-of-court procedure.”
 The authority to foreclose basically emanates
from the contract of mortgage or pledge- Bank
acts as an agent to execute the sale of the prop-
erty.
 Foreclosure….
 The power of sale must be expressly conferred on the
mortgagee by the terms of the mortgage.
 There shall first be failure of the debtor to meet his
obligations according to the contract;
 Giving default notice to the mortgagor is a condition
precedent that must be complied with;
 The sale must be by auction preceded by advertise-
ment of sale.
 Power of sale foreclosure is introduced to our legal
system in 1997 by Proclamation No. 65/97 later re-
pealed by Proc. No. 97/98 & 98/98.
 Foreclosure….

3. Judicial Foreclosure
 Judicial Foreclosure is “a legal procedure in which a
court orders real estate to be sold to enforce the
mortgaged/pledged right under the mortgage/
pledge.’’
 This is carried out upon application of the
pledgee/mortgagee creditor.
 Prior to 1997, judicial foreclosure has been serving
as a sole method of foreclosure used by banks and
other creditors in Eth.
 Foreclosure….
 Judicial foreclosure is the best method of de-
termining conclusively the rights of all inter-
ested parties; why so & how so?
 However, it is also complicated, time consum-
ing and costly since it involves a long series of
judicial proceeding.
 Foreclosure….

Salient Features of Ethiopian Foreclosure

proclamation
 Proclamation No. 97/1998 contemplates a foreclo-
sure rules that are close by nature for a power of
sale foreclosure procedure.
 The proclamation actually amended only two provi-
sions of the Civil Code: Articles 2851 and 3060.
 Basically, the proclamation expands the freedom of
contract between the Bank and the mortgagor/
pledgor.
 Foreclosure….
 Hence, the bank and mortgagor/pledger are now al-
lowed to get into agreement for the sale of pledged/
mortgaged property without a need to go to the
court- art. 3 of the proc.97/98.
 The whole purpose of this proclamation is meant to
cut short the trial and execution process of courts to
enforce a contractual agreement during sale of the
mortgaged or pledged property.
 The only responsibility that is put on the Bank is to fol-
low the rules of auction specified in Articles 394 - 449
of the Civil Procedure Code
 Sale of pledge….
Condition to exercise power of sale:-
 Before initiating the selling of the collateral mort-
gaged/pledged, giving default notice to the debtors
for the minimum 30 days.
 Estimation of the floor price of the property for the
first auction[Art. 428(1) of the Civil Procedure Code]-
estimated value made by whom?
 Notice of sale (advertising auction sale)- as to ele-
ments of notice of sale see arts. 394-449 of the civil
procedure code. Issue of frequency of the publication
of the advertisement…..???
 Sale of pledge….
 Acc. to art. 3 of the proclamation, the sale shall be
conducted by public auction- one safeguard for the
interest of the debtor/mortgagor/pledger.
 The sale of the thing shall be effected to the highest
bidder- art. 428 of the civil procedure code.
 For a valid auction to exist, more than one bidder
shall appear and offer for sale in the first auction.
 If the second auction fails due to non-appearance of
bidders, the bank will take over the property at the
floor price set for the auction[Amendment Proc. no.
216/2000].
 Sale of pledge….

 Can the auctioneer bank bid for the property?

Acc. to art. 431 of the civil procedure….. no auc-
tioneer shall bid for the property… b/c acting as
an agent of the debtor…..art 2188(2) of the Civ.
Code.
What if the selling bank-creditor fail to comply
with the formalities prescribed for the sale by
auction of properties:-
 In other legal systems, the debtor and presum-
ably other junior creditors may institute an ac-
tion for the sale be set aside.
 Sale of pledge….

 In our case, the bank shall be liable for any damage

it causes to the debtor in the process of selling by
auction in violation of the rules prescribed[art. 6 of
Proc.no. 97/98]…amount of damage???
 But the effect of defective sale is different in pledge
and mortgage- See Art 435 of the civil procedure
code.
 ‘No irregularity in publishing or conducting the sale
of movable property shall vitiate the sale.’
 But any damage caused by the defective sale can be
redressed by compensation.
 Sale of pledge….
 In defective sale of mortgaged
property(immoveable), unlike the case of pledge,
the sale can be set aside if substantial damage was
sustained as a result of the sale………
 Chapter Three
Mortgage (Security of Immovables)
 Mortgage- another type of real security……
Definition
 Mortgage- is where immovable property or in some
cases, special movable property is given as a security
to guarantee the performance of an obligation.
 In the early Roman law, hypothec security (in old
times equivalent to security over property).
 In the modern legal systems, while security on mov-
ables is referred to as “pledge” and security on im-
movable is termed as “mortgage”
 Mortg….
Marcel Planiol: mortgage is a real security which
without presently dispossessing the owner of the
property hypothecated, permits the creditor at the
due date to take it over and have it sold, in who-
sever hand it is found and to get paid from the
proceeds by preference to the other creditors.
Basic elements of the def’n:-
 mortgage is a real security;
 mortgage doesn’t result in dispossession of the
debtor;
 Mortg….

entitles the creditor to exercise his security

right only if the debtor fails to perform his
obligation;
the principal rights of the mortgagee creditor:-
the right to follow the property(the right of
pursuit) & the right to be paid in priority to
other creditors (the right of preference).
 Mortg….
Subject matter of mortgage
 At the early stage, mortgage could be created on any
form of property whether immovable or movable.
 In the present days, mortgage is created principally
against immovable.
 In our law:- mortgage principally charges immovable
together with its intrinsic elements and accessories
& in some exceptional situations where special type
of movables & business may be mortgaged (See Art.
3047(2) civil code & Arts. 171ff from the 1960 com-
mercial code).
 Mortg….
The Essential Characteristics of Mortgage-
 1st, It is a real right - which create relation be-
tween the creditor and the mortgaged property-
rights in rem(rights on a thing).
 It entitles the mortgagee creditor to exercise his
security right against the property wherever the
property may be.
 2nd, It is principally created against immovable-
essential difference between pledge and mort-
gage as real securities…..art. 3047(2). In some ex-
ceptional situations special type of movables &
business may be….
 Mortg….
 3rd, It is accessory to the principal obligation-
simply assists the enforcement of another princi-
pal right.
 The existence of mortgage depends on the exis-
tence of the principal claim [See arts.3109/1/
&3110/a].
 4th, Indivisibility of mortgage-one of the essential
characters of mortgage. Almost all securities, by
their nature, are indivisible.
 The unpaid part of the claim shall be secured by
the total value of the original mortgage- (See
arts. 3055/3/ & 3087).
 Mortg….

What makes mortgage preferable to other forms of se-

curities?
Planiol:- Of all the securities which have been invented in
favor of creditors, the most perfect is certainly the
mortgage. Why so?
Firstly, Mortgage provides perfect protection b/c the
creditor can proceed against the property in whosever
hand it may be.
Secondly, it does not result in the dispossession of the
debtor- has right & power to possess & use, create rights
for others or even dispose the property (See Arts. 3059,
3081, 3084, 3088 of the Civ.Code).
 Requirements :- Creation and Enforcement

What are the formal and substantial requirements in

the formation and operation of mortgage?
1. Written form
 Mortgage is required to be made in writing (See Art.
3045(1) of the civil code)- a form prescribed by law.
2. Registration
 Registration is another most important requirement
for the validity & effective operation of mortgage.
 Whatever its type, mortgage can have a legal effect
only if it is duly registered (Art. 3052 of the civil
code).
 Mortg requ’t….
 Registration guarantees two principal rights:
 The first is the right of priority in payment- the right
to be paid first from the proceeds of the sale of the
immovable…. the right of preference.
 The second is the right to follow the mortgaged im-
movable in the hands of third parties…. the right of
pursuit.
 Registration also serves the purpose of publicity to all
third parties regarding any rights & encumbrances on
the immov…..
 Mortg requ’t….
 In Ethiopia, registration is one of the essential
preconditions for the valid existence and effective-
ness of mortgage- right of preference and right of
pursuit (See Arts. 3052, 3057, 3059(1)(2) and
3081/82 and 3085, 3088/89 & 1723 of the civil
code ).
3. Ownership [See articles 3049 and 3050/51 of the
civil code]
 The person creating mortgage(mortgagor) should
have full ownership of the mortgaged property
before or on the date of creation of mortgage- a
special capacity requirement.
 Mortg requ’t….
4. Specification of the maximum claim secured by the
mortgage [Art. 3045(2) of the civil code]
The maximum claim secured by the mortgage has to
be clearly specified in the document(contract) creating
mortgage.
This is principally to inform all third parties (other
creditors, purchasers, etc…) and to enable the debtor
to create another mortgage on the same immovable.
 Types of Mortgage
Based on its source, mortgage may be divided
into three major types:- : legal mortgage, judicial
mortgage & contractual mortgage.
I. Legal mortgage- where the source of mortgage is
provisions of law without any agreement be-
tween the creditor and the debtor …
Here the law providing a special protection to
certain creditors.. E.g. Seller of an immov.(Art.
3042 of the civil code), Co-heirs……etc.
 Types mortg….

II. Judicial mortgage- where the mortgage arises

from the decisions of the courts… Art. 3044 of the
civil code.
The right of mortgage for the creditor is provided
by decision making organs, principally Courts and
Administrative Tribunals…to ensure enforcement
of decisions/judgements.
 Types mortg. …
III. Contractual mortgage- is created by agreement
between the mortgagor and the mortgagee/credi-
tor & is the most prevalent form….
Contractual mortgage arises from clear/express
agreement between the mortgagor and the mort-
gagee by fulfilling all the legal requirements…
Most provisions of the civil code on mortgage
principally deal with the case of contractual mort-
gage. See arts. 3041, 45, etc.
 Effects of Mortgage
 Like any contractual relations, the creation of
mortgage results in rights and duties for the par-
ties to the contract of mortgage- &may even af-
fect the interest of third parties.
A.Principal effects of mortgage on the parties
to a mortgage contract:
 In terms of the principal rights and duties of
the parties to mortgage……
 Effects mortg. …
I. The Rights of the Creditor (mortgagee):
The creditor derives two principal rights from
mortgage:
1st, the right to be paid from the proceeds of the
sale of the property, in priority to any other credi-
tor-termed as the right of preference or priority in
payment & ;
2nd, the right to follow the property in the hands of
third parties whose right is registered after the registra-
tion of the mortgage- termed as the right of pursuit
[See Arts. 3059, 3081/82, 3089, etc.
 Effects mortg. …
The extent of priority (what are the claims
covered by the priority?):-
the principal claim/capital of the claim(3076),
the contractual interest (3077),
necessary expenses incurred for the preserva-
tion of the immovable and insurance premi-
ums (3069),
Cost of proceeding for the attachment of the
immovable, and
legal interest,
 Effects mortg. …

The property to which the priority right

applies/extends:- the priority right of the
creditor applies to:-
 the principal immovable,
its intrinsic elements and accessories,
improvements,
the rent after due date,……(3065)
 Effects mortg. …
II. The Rights of the Debtor(Mortgagor) on the
Property: … See arts.3084 and 3088 of the civil
code…
As the debtor is not dispossessed of…. he con-
tinues to possess and exercise his right of own-
ership on the thing until maturity of principal
claim.
Thus, the debtor can create another addi-
tional mortgage or other real rights on the
property…..
 Effects mortg. …
B. The place of third parties in the mortgage relations:-
The buyer of mortgaged property or any third party
mortgagor may be considered as third party in a princi-
pal relation b/n the debtor & the creditor.
Case of the buyer of mortgaged immovable:-
it is the duty of third party, before entering into con-
tract of sale, to check what rights have been already
created and registered on the immovable.
Such third parties can exercise remedies under arts.
3090, 3091, 3093, 3094, 3095 & 3097 by fulfilling some
legal preconditions.
 Effects mortg. …
Protection to third party purchasers:-
 The first remedy- the third party assumes the
position of the guarantor and then makes use of
any rights or defenses available for a
guarantor(art.3090 & 1920ff)- What are defenses
for the guarantor??
 The law considers the buyer of mortgaged im-
movable as a guarantor who can raise all possi-
ble defenses against the action brought by the
creditor-mortgagee.
 Effects mortg. …
 But this rule changes the real right of the credi-
tor to the personal right as the creditor is going
to face all the defenses.
 If the third party cannot avail himself of Art.
3090, then the creditor (mortgagee) has the right
to follow the property in the hands of such third
party.
 The second remedy is that third party has a right
to claim compensation, from proceeds of the
sale, for the improvements that he has made on
the immovable(art.3093). See other rights of….
 Effects mortg. …
 The other possible remedy of the third party is
the right to bring action for warranty against the
debtor (arts.2281ff).
 If the third party is dispossessed, he has the right
to be subrogated to the right of the creditor (Arts
3095& 3097, 1971ff).
The case/position of third party mortgagor:-
 Where the immovable is given as security by a
non-debtor third party on behalf of the real
debtor, such third party is referred as guarantor
under Arts. 3105– 3108.
 Effects mortg. …
The maximum liability of the guarantor (third
party mortgagor) is limited to the immovable
that he has given as security.
Other properties/assets of the guarantor are
not liable under Art. 3105.
Moreover, the third party mortgager can avail
himself of all the defenses/remedies that are
available for any third party who acquires the
immovable mortgaged from the debtor (Art.
3107, 08 Vs. Art 3094 & 3098 ).
 Effects mortg. …

Critically examine the pros & cons of the

rule that allows the buyer of mortgaged
immovable or third party mortgagor to
raise against the mortgagee all the de-
fenses available for a guarantor……..!!!!
Also read the case decided by………in
your material.
 Extinction of mortgage
• The extinction of mortgage also should be evidenced
by cancellation of the registration.
• The main proof of extinction of mortgage is cancella-
tion of the registration– Art 3109.
Cancellation of regist’n may be sought:-
 if the principal claim is extinguished or settled(3110),
 where the creditor renounces his right of mortgage
(3110&3112),
 Where the mortgaged property is sold;
 when the creditor makes the subrogation impossi-
ble(3113-16)
 Execution of Mortgage:- sale of mortgage
Enforcement of security right of the mortgagee is
effected through sale of the mortgage process.
 The sale and enforcement of mortgage right also fol-
lows similar rules & procedures to that of sale of
pledge.
 Hence, you can make a reference to general princi-
ples under Arts. 3060–3063, pledge provis’ns, fore-
closure laws & relevant Civ.P.C. rules.
 Chapter Four
Other ‘Security Devices’
The main relations under this chapter are:-
 Antichresis (Arts. 3117ff),
 Assignment of rights (Arts.1962ff);
 Sale with ownership reserved (as provided under
Arts. 2387ff),
 Sale with the right of redemption (as provided
under Arts. 2390ff),
 Lien rights in various circumstances (laws).
 Antichresis
General
 Antichresis can be created to secure the per-
formance of a given primary obligation.
 Antichresis is simply a special type of mortgage-
in its purpose, subject matter, requ’ts for cre-
ation, etc.
 Like all other securities, antichresis also has acces-
sory character(Art. 3128).
 Antichresis….

Definition
 Antichresis has been defined under Art.3117
as ‘… a contract whereby the debtor under-
takes to deliver an immovable to his creditor
as a security for the performance of his obliga-
tions.’
 Antichresis….
Essential elements of the definition of antichresis:-

 antichresis is a contractual relation between the

debtor and the creditor. - it arises only from con-
tract.
 antichresis can be created only against immov-
able.
 the principal purpose of antichresis is to secure
the performance of an obligation.
 the immovable will be delivered to the creditor.
 Antichresis….

Creation of Antichresis:-
 The requirements for creation of antichresis
are almost similar to those of requirements
for the valid creation and effectiveness of
mortgage.
 So all the requirements for the valid creation
and effectiveness of mortgage shall apply to
contract of antichresis (3118). What are such
requirements?
 Antichresis….

Distinction between antichresis and mortgage

 Unlike the case of Mortgage, in Antichresis the
possession of the mortgaged immovable will be
transferred to the creditor(Art. 3117). So compare
& contrast with pledge!
 Before transfer of possession of the immovable or
if the immov remains in the possession of the
debtor, then the contract of antichresis remains to
have the same effect as mortgage(3121).
 Upon transfer of possession, the creditor is entitled
to use the immovable.
 Antichresis….

 The use that the creditor derives from the

immovable replaces the interest to be calcu-
lated on the principal claim (3124).
 The creation of antichresis has to be necessar-
ily supported by contract(3119).
 Other Affiliated Cases
There are certain relations which, at least in-
directly, have the purpose of securing the
performance of an obligation.
Consider the ff cases:-
Assignment of rights(Art.1964),
Sale with ownership reserved(Art.2387),
Sale with right of redemption (Art.2390),
Lien rights by law(Art.2224, 2398, 2794, etc)
The End!!!!