The Unsettled Concept of Performance Bond in Ethiopia: Practical Problems in Determining the Scope of the Obligee’s Right to Compensation

Abstract

Performance bonds, most of the time, are issued to cover a small percentage of a contract price. When damage occurs, there may be a remaining damage, in excess of the performance bond, that may need to be otherwise accounted for. This raises the question of whether or not it is possible to claim the remaining amount from the principal debtor. In Ethiopia, the Federal Supreme Court Cassation Bench has passed two contradictory decisions. One is found in file number 47004, passed in 2012, which held that performance bonds are suretyship which in effect means that the obligee is entitled to claim full reparation to the stated amount in the performance bond from the issuer/surety, and the remaining from the principal debtor. The second decision is found in file numbers 69797 and 98348 which held that a principal debtor is liable and the obligee is entitled to claim only to the extent of the performance bond. This decision adversely impacts the obligee by limiting the amount of compensation that he may claim from the principal debtor. However, the decisions are contradictory and lack detailed factual and legal analysis. This article, by adopting a doctrinal research approach, examines the law and performance bonds of selected Ethiopian banks and insurance companies in order to see whether a performance bond limits the liability of a principal debtor or not. The article concludes that the limit of liability of a principal debtor and the right of an obligee depends on the terms of the underlying contract. Thus, performance bonds do not limit the liability of a principal debtor towards the obligee.