Civil Code > TITLE XVII. CONTRACTS FOR THE CUSTODY, USE OR POSSESSION OF CHATTELS 11

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Chapter 6. Contracts of Pledge

Section 1. Contracts of Pledge in General

Paragraph 1. – Conditions for the validity of the contract

Art. 2825 – Definition.

A contract of pledge is a contract whereby a debtor undertakes to deliver a thing, called the pledge, to his creditor as security for the performance of an obligation.

Art. 2826 – Person furnishing the pledge.

A contract of pledge may be made between the creditor and a third party to secure the debt of another person.

Art. 2827 – Debt guaranteed.

A contract of pledge may be made in order to guarantee a future or conditional debt.

Art. 2828 – Form of contract.

(1) The maximum amount of the debt guaranteed shall in all cases be specified in the contract of pledge or the contract shall be void.

(2) Where the amount exceeds five hundred Ethiopian dollars, the contract of pledge shall not be valid except where it is evidenced by writing and as from the day when such deed acquires undisputed date.

Art. 2829 – Pledge.

(1) The pledge may consist of a chattel, a totality of effects, a claim or another right relating to movable property.

(2) It must be capable of being sold separately by public auction.

Art. 2830 – Creditor’s possession.

(1) The creditor shall be deemed to be in possession of the pledge where the document of title without which the pledge cannot be disposed of has been delivered to him.

(2) The provisions of sub-art (1) shall apply in particular where a voucher for goods warehoused, or the bill of lading or way-bill in the case of goods in transport, has been endorsed in his favour.

Art. 2831 – Possession by an agreed third party.

(1) The parties may agree that the pledge be delivered to a third party acceptable to them both.

(2) The rights and duties of such third party shall be as prescribed by the provisions relating to the bailment of goods or warehousing.

Art. 2832 – Debtor’s possession.

(1) The furnishing of a pledge without dispossession of the debtor may be made in such cases only as are expressly provided by law.

(2) In all other cases, the contract shall be of no effect where it stipulates that the pledge shall remain with the debtor.

Art. 2833 – Regulation of contract of pledge.

(1) The rules governing contracts of pledge are to be found, in addition to this Chapter, in the special laws relating to particular cases and forms of pledging or to the institutions authorized to lend against security.

(2) The special rules governing the committal of goods in warehouses are given above in the Chapter on warehousing.

Paragraph 2. – Rights and Duties of Pledger

Art. 2834 – Ownership of pledge.

(1) The pledger shall retain his rights on the pledge, save for the restrictions arising out of the contract of pledge.

(2) He may dispose freely of his rights and may in particular alienate the pledge or re-pledge it subsequently.

Art. 2835 – Cost of maintaining and preserving the pledge.

The pledger shall reimburse the pledge for expenses incurred in maintaining and preserving the pledge.

Art. 2836 – Abuse by creditor.

Where the creditor fails to observe the provision of the law in respect of the pledge, the pledger may demand that it be delivered to a trustee.

Art. 2837 – Premature payment of the debt.

(1) The pledger may at any time demand the return of the pledge by paying the debt secured by it.

(2) Any stipulation to the contrary shall be of no effect.

Art. 2838 – Pledge furnished by a third party.

(1) Where the pledge has been furnished by a third party, no contract between the creditor and the debtor made subsequently to the furnishing of the pledge may impair the third party’s position.

(2) The pledger may set up against the creditor all the defenses the debtor himself could have raised, without it being possible to set up against him the fact that the debtor had waived them.

Paragraph 3. Rights and Duties of Pledgee

Art. 2839 – General principle.

(1) The pledge shall have on his debtor’s property the rights of a creditor.

(2) He shall in addition have on the pledge the particular rights deriving from this Chapter.

Art. 2840 – Use of the pledge.

The pledge may not make use of the pledge without the pledger’s consent, except where such use is necessary for its preservation.

Art. 2841 – Fruits.

(1) Where the pledge produces fruits, the creditor, or the custodian of the pledge, shall collect them.

(2) The fruits shall become the property of the pledgee.

(3) The value of the fruits produced by the pledge shall be applied successively to the expenses incurred for the custody and preservation of the pledge, to interest and to the capital of the debt secured.

Art. 2842 – Action for possession.

(1) The pledge may bring actions for possession in respect of the pledge.

(2) The custodian of the pledge shall inform the pledgee and the pledger without delay of circumstances requiring the institution of such actions.

Art. 2843 – Third party’s claim to the pledge.

The pledgee may exercise the rights deriving from the contract of pledge notwithstanding that the pledge has been delivered to him by a person who was not authorized to dispose of it.

Art. 2844 – Exception.

(1) The owner of the pledge may take it back where he shows that the pledgee knew or should have known, on the making of the contract, that the other party was not authorized to pledge the thing.

(2) He may also take the pledge back by discharging the debt secured by it.

Art. 2845 – Return of pledge.

(1) The creditor shall return the pledge to the pledger or to the person designated by him, where the contract of pledge is extinguished by payment of the debt or for any other reason.

(2) Until the pledge is returned, he shall be liable for the loss of or damage to the pledge in accordance with the provisions of Art. 2720.

Art. 2846 – Lien.

The pledge may retain the pledge until monies due to him under the provisions of this Chapter have been paid in full.

Art. 2847 – Loss or deterioration of the pledge.

Where the pledge has been entrusted to his keeping, the pledge shall be liable for its loss or deterioration as provided in Art. 2720 and 2721 of this Code.

Art. 2848 – Subrogation to property rights.

Where the pledge is lost or damaged for any reason whatsoever, the pledgee’s right shall apply to the compensation due for its replacement from the person liable for the loss or deterioration, from the insurer or from the person who has expropriated it.

Paragraph 4. – Extinction of Contract of Pledge

Art. 2849 – Accessory character of the contract.

The contract of pledge shall be extinguished and the pledge shall be returned where the debt it guaranteed is discharged.

Art. 2850 – Indivisibility of pledge.

The creditor may not be compelled to return the pledge or part thereof until he has been paid I full, notwithstanding that the debt or pledge is divisible.

Paragraph 5. Sale of Pledge

Art. 2851 – Commissoria lex.

(1) Any agreement, even subsequent to the furnishing of the pledge, authorizing the creditor, in the event of not-payment on the due date, to take possession of the pledge or to sell it without complying with the formalities required by law shall be of no effect.

(2) It may however be agreed, after the debt has become due, that the debtor shall make over the pledge to the creditor in settlement of the debt.

Art. 2852 – Effect on third parties.

(1) The contract of pledge shall not affect third parties unless the pledge is in the possession of the pledge, or the person designated for the purpose by the parties, at the time when the pledge invokes the contract.

(2) The contract of pledge shall be of no effect where at that time the pledge is still in the debtor’s possession or it has returned to his possession with the pledgee’s consent or it is in the possession of a third party from whom the creditor cannot demand its return.

Art. 2853 – Default.

(1) Before causing the pledge to be sold, the pledgee shall call upon the pledger to discharge his obligation and give him due notice that, upon default, he will cause the pledge to be sold.

(2) Similar notice shall be given to the third party who has furnished the pledge.

Art. 2854 – Sale of pledge.

(1) Where, within eight days from the notice provided in Art. 2853, no objection has been raised or the objection is dismissed, the pledgee may cause the pledge to be sold by public auction.

(2) Where the pledge is quoted on the market or has a current price, the pledge may cause it to be sold by private contract through the intermediary of a person authorized to make such sales.

Art. 2855 – Limitation by the court.

The court may, on the application of the pledger, limit the creditor’s right to the sale of one of the pledges which is sufficient to pay off the pledge.

Art. 2856 – Assignment of pledge to the pledge.

The pledgee may apply to the court to order that the pledge be given to him in payment, to the extent of the amount due to him, according to an expert valuation or the current price of the pledge, where it is quoted on the market.

Art. 2857 – Priority right.

(1) The pledge may be paid out of the proceeds of the sale of the pledge before all other creditors.

(2) In addition to the debt specified in the contract of pledge, the pledge shall secure the contractual interest and legal interest on the debt and the expenses incurred for the custody, preservation or sale of the pledge.

Art. 2858 – Limitation of creditor’s rights.

(1) The pledge may not enforce his priority right arising out of the contract of pledge beyond the maximum amount specified therein.

(2) The pledge may not enforce his priority right to obtain security for another debt, even if incurred subsequently to the contract of pledge, owed to him by the debtor or pledger.

Art. 2859 – Disposal of proceeds.

(1) The proceeds shall be attributed to the creditor to the amount of the debt due to him and shall be deemed to have been paid by the pledger.

(2) The balance of the proceeds shall be handed over to the pledger.

Art. 2860 – Several pledges.

(1) Where the pledge is encumbered with several rights of pledge, the creditors shall be paid according to their rank.

(2) The rank shall be determined by the dates on which the various pledges were entered into.

Art. 2861 – Purchaser’s rights.

The purchaser of the pledge shall acquire the ownership thereof free of any encumbrance.

Art. 2862 – Creditor’s liability.

A creditor who sells a thing belonging to a third party which has been duly pledged shall not be liable unless he knew or should have known, on the making of the contract, that it belonged to the third party.

Section 2. Pledging of Claims or other Intangibles

Art. 2863 – Relation of pledger and debtor.

The provisions governing the relations of a guarantor and principal debtor shall apply to the relations between a third party who has finished a pledge and the principal debtor.

Art. 2864 – Claims not established by title.

(1) The pledging of claims which are not established by a title shall, regardless of the amount of the sum guaranteed, be executed in the form of a document specifying the claim pledged and the maximum amount of the debt guaranteed.

(2) The pledging shall be notified, under pain of being declared void, to the debtor of the claim which has been pledged, or shall be accepted by him in a document of undisputed date.

Art. 2865 – Rights not established by title.

(1) The pledging of rights which are not rights of claims and which are not established by a title shall be executed in the forms prescribed for the transfer of the said rights.

(2) A document of undisputed date, and adequately specifying the right pledged and the debt guaranteed, shall be required in all cases, under pain of nullity.

(3) Nothing shall affect such special provisions as may govern the pledging of some of such rights.

Art. 2866 – Acknowledgement of debt.

(1) Where the claim or right pledged is established by an acknowledgement of debt or by anther non-negotiable instrument, such instrument shall be delivered to the pledge or the third party named in the contract of pledge.

(2) The pledging of claims and rights established by negotiable instruments shall be carried out in accordance with the provisions of Art. 950-958 of the Commercial Code.

Art. 2867 – Claims producing periodical income. – 1. Extent of pledge.

(1) A pledge founded on a claim yielding interest or other periodical income, such as a dividend, shall, unless otherwise provided, apply only to current benefits to the exclusion of those previously due.

(2) Where such accessory benefits are represented by separate titles, they shall not be included in the pledge unless themselves committed in the form required by law.

Art. 2868 – 2. Rights and duties of pledge.

(1) The pledge shall collect the interest on the claim pledged with him and all other periodical payments due from the debtor under his claim.

(2) He shall apply the proceeds successively to the expenses due to himself, to interest and to the capital of the debt guaranteed.

(3) The pledger may not object to such payment.

Art. 2869 – Preservatory measures.

The pledge shall take such steps as are necessary to prevent the extinction of the claim or right pledged with him.

Art. 2870 – pledged shares.

Pledged shares shall be represented at the annual general meeting of the company by the shareholder himself and not by the pledge.

Art. 2871 Rights of debtor of claim pledged.

(1) The debtor of the claim which has been pledged may set up against the pledge the defenses he is entitled to raise against his won creditor.

(2) Where he has accepted the pledging without reservation, he may however not oppose the setting-off of a counter-claim which arose against his own creditor before his acceptance.

Art. 2872 – Collection of debt pledged.

(1) The pledge shall collect the debt pledged with him when it falls due.

(2) However, where the pledger objects to such payment, the debtor may obtain his discharge only by depositing the sum or the goods due from him.

(3) Sums of money or other fungible things received in payment shall be deposited in the place agreed upon by the parties or, in the absence of such agreement, in a place fixed by the court.

Art. 2873 – Sale of claim or right pledged.

Where the debt secured has become due, the pledge may cause the debt or right pledged with him, or the goods received from the debtor in payment, to be sold as provided in Section 1 or this Chapter.

Art. 2874 – Reference to preceding section.

Anything relating to the pledging of claims or intangibles that is not governed by this Section shall be governed by the provision of Section 1 of this Chapter.

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