An Analysis of Legal Interpretations in Ethiopia

In the current legal landscape of Ethiopia, the Cassation Division’s interpretation regarding Unconditional (Demand) Guarantees has achieved relative clarity. It is now widely accepted that an unconditional guarantee is an independent instrument, distinct and autonomous from the underlying contract. Consequently, the issuing bank is not burdened with the responsibility of investigating whether the guaranteed party has fulfilled their contractual obligations. If a "complying demand"—a payment request that matches the terms of the bond—is presented by the beneficiary, the institution is legally obligated to pay. The previous ambiguities in this specific area have largely been resolved.

However, the primary challenge in legal interpretation today lies with the Conditional Guarantee Bond.

The Conflict of Interpretation

The Cassation Division has repeatedly maintained that conditional bonds are governed by the Suretyship provisions of the Civil Code. This stance, while intended to provide a legal framework for these instruments, raises fundamental conceptual questions.

What does it truly mean for a guarantee bond to be "conditional"?

In a standard Suretyship Contract under the Civil Code, the guarantor (surety) acts as a co-litigant. The surety has the right to raise defenses based on the performance of the underlying contract. For instance, in a construction dispute, a surety can argue, "The contractor performed according to the contract; therefore, I am not liable," and present evidence to that effect. If the contractor prevails in the primary dispute, the surety is exonerated.

But should this logic apply to a Guarantee Bond?

The Nature of the "Condition"

Let us take a Performance Bond as an example. While it is true that the guarantor’s obligation to pay arises only when the principal debtor fails to perform, this does not mean the guarantor (the bank or insurance company) should be dragged into the granular litigation of the underlying contract between the employer and the contractor.

In a Conditional Bond, the focus should strictly be on whether the agreed-upon condition specified in the document has been met.

• Example 1: If the bond states, "Payment shall be made upon the submission of a First Instance Court decision confirming the contractor's liability," then the bank is obligated to pay as soon as that specific court order is presented. The "condition" of the document is satisfied.
• Example 2: If the condition is an "Adjudicator’s Decision," the obligation to pay is triggered by the submission of that decision alone.

Therefore, a Guarantee Bond—whether conditional or unconditional—is a Security Instrument where the obligation is defined by the text of the bond itself, not a contract that invites the guarantor into the merits of the primary contractual dispute.

The Cassation Paradox

The attempt to equate a "Bond" with "Suretyship" has led to contradictory rulings. Consider Cassation File Nos. 40186 and 36935.

In these cases, the court initially held that because the bonds were conditional, they were "Suretyship Contracts" governed by the Civil Code. However, a challenge arose: under Ethiopian Civil Code, a suretyship contract must be witnessed by two individuals to be valid. These bank-issued bonds lacked such witnesses.

To avoid nullifying thousands of commercial instruments, the court pivoted to an inconsistent position: "Even though it is a suretyship contract, because it is issued within the scope of banking practices, it does not require two witnesses."

This is a "yes, but no" legal stance. If a document is legally classified as a "Suretyship Contract," there is no legal basis to waive the mandatory formal requirements (witnesses) that give that contract life. Either it is a suretyship (requiring witnesses) or it is not.

The Solution: A Sui Generis Classification

The exit from this interpretational deadlock is to recognize that a Guarantee Bond—regardless of its conditions—is not a traditional suretyship.

The root of the problem is the judicial tendency to force modern commercial and banking instruments into the "boxes" of existing, decades-old civil law sections. It must be acknowledged that certain modern commercial documents may not have direct, tailor-made coverage in the 1960 Civil Code.

In such instances, the courts should classify these instruments as Sui Generis ("of its own kind" or "in a class by itself").

Conclusion: A Guarantee Bond is not a Suretyship Contract; rather, it is an independent Security Instrument that should be governed by its own terms and international banking standards, ensuring speed and certainty in commercial transactions.