Implied Authority of Partner Under Indian Partnership Act, 1932

Implied authority of a partner refers to the power given to every partner under the Indian Partnership Act, 1932, to act on behalf of the partnership firm and bind the firm through acts done in the usual course of business. Since every partner is considered an agent of the firm, actions performed within the scope of implied authority create legal obligations for the firm and all other partners.

What Is Implied Authority of a Partner?

Under the Indian Partnership Act, 1932, a partnership is based on the principle of mutual agency. Section 4 of the Act defines partnership as a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

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This concept of “acting for all” creates the relationship of agency between partners and the firm. Every partner has a dual position:

• A partner who has rights and duties in relation to other partners.
• An agent who has authority to represent the firm in dealings with third parties.

Section 18 of the Indian Partnership Act, 1932 provides that a partner is the agent of the firm for the purposes of the business of the firm. Therefore, when a partner performs an act connected with the firm’s business within the scope of his authority, that act binds the firm as well as all other partners.

The authority of a partner that arises from the legal position of being a partner, rather than from any specific agreement, is known as implied authority.

In simple words, implied authority means the authority that a partner naturally possesses to perform acts necessary for carrying on the ordinary business of the partnership firm.

For example, if a partner of a firm running a garment business purchases cloth from suppliers on behalf of the firm, such purchase will generally bind the firm because purchasing raw materials is connected with the ordinary business of the firm.

Types of Authority of a Partner

The authority of a partner is generally divided into two categories:

Express Authority

Express authority is the authority specifically granted to a partner by an agreement between the partners.

It may be provided through:

• Written terms of the partnership deed.
• Oral agreement between partners.

For example, a partnership deed may specifically authorise one partner to borrow money, enter into contracts, or manage particular business operations on behalf of the firm.

Implied Authority

Implied authority is the authority that arises from the nature of partnership and the position of a partner as an agent of the firm.

It allows a partner to perform acts that are:

• Related to the business of the firm.
• Usually performed in the course of such business.
• Done in a manner indicating an intention to bind the firm.

The main provision governing implied authority is Section 19 of the Indian Partnership Act, 1932.

Section 19 of the Indian Partnership Act, 1932: Meaning and Scope of Implied Authority

Section 19 explains the extent of implied authority of a partner.

According to Section 19(1), an act done by a partner in the usual way for carrying on the business of the firm binds the firm.

The authority given under this provision is called implied authority.

However, every act of a partner cannot bind the firm. The act must satisfy certain conditions.

Conditions For Exercising Implied Authority of a Partner

For an act of a partner to fall within implied authority, the following conditions must be satisfied:

The Act Must Relate to the Business of the Firm

The transaction must be connected with the nature of business carried on by the partnership firm.

For example, if two persons operate a shoe manufacturing business, a partner entering into a contract for purchasing leather would generally bind the firm. However, a contract for purchasing books would not normally bind the firm because it is unrelated to the firm’s business.

The Act Must Be Done In The Usual Course of Business

The act must be something normally performed while carrying on that particular business.

There is no fixed definition of what constitutes the “usual course of business”. It depends upon:

• Nature of business.
• Commercial practices followed in that industry.
• Circumstances of each case.

An act that may be usual in one type of business may be unusual in another.

For example, borrowing money may fall within implied authority in a trading firm because borrowing is often necessary for business operations. However, the same may not apply to a professional partnership where borrowing money is not a normal business activity.

The Act Must Be Done In The Name of the Firm

The transaction should be carried out:

• In the name of the partnership firm; or
• In a manner showing an intention to bind the firm.

Section 22 of the Indian Partnership Act provides that an act or instrument executed by a partner in the firm name or in any manner expressing an intention to bind the firm shall bind the firm.

Acts Covered Under Implied Authority of a Partner

A partner generally has implied authority to perform acts necessary for conducting the ordinary business of the firm.

Examples include:

• Buying and selling goods connected with the firm’s business.
• Entering into contracts with customers and suppliers.
• Receiving payments on behalf of the firm.
• Issuing receipts for payments received.
• Hiring employees required for business operations.
• Appointing service providers for business activities.
• Managing routine business transactions.
• Advertising and promotional activities.
• Maintaining business records and accounts.

Such acts are considered part of normal business management and generally bind the partnership firm.

Acts Not Covered Under Implied Authority

Section 19(2) of the Indian Partnership Act, 1932 specifies certain acts that cannot be performed under implied authority unless there is a usage or custom of trade allowing them.

A partner does not have implied authority to:

Submit Disputes To Arbitration

A partner cannot refer disputes relating to the firm’s business to arbitration on behalf of the firm merely through implied authority.

Such action requires specific authority because arbitration affects the legal rights of the firm.

Open Bank Account In Personal Name

A partner cannot open a bank account on behalf of the firm in his own name. The account must represent the firm and not the individual partner.

Compromise Or Abandon Claims

A partner cannot compromise, withdraw or relinquish any claim belonging to the firm without proper authority.

Withdraw Legal Proceedings

A partner cannot withdraw a suit or legal proceeding filed on behalf of the firm through implied authority alone.

Admit Liability In Legal Proceedings

A partner cannot admit liability in a suit against the firm unless authorised to do so.

Enter Into Partnership On Behalf of the Firm

A partner cannot make the firm a partner in another partnership business without express authority.

Entering into another partnership changes the legal relationship of the firm and therefore requires consent.

Acquire Immovable Property

A partner cannot purchase immovable property on behalf of the firm through implied authority.

Such transactions involve substantial rights and obligations and require specific authorisation.

Extension And Restriction of Implied Authority Under Section 20

Section 20 of the Indian Partnership Act allows partners to extend or restrict the implied authority of any partner through an agreement.

Therefore, partners have the freedom to decide the extent of authority given to each partner.

For example:

• A partnership deed may restrict one partner from borrowing money.
• Partners may authorise a particular partner to enter into property transactions.

However, restrictions created between partners mainly regulate their internal relationship.

A third party dealing with the firm will not be affected by such restrictions unless:

• The third party knows about the restriction; or
• The third party does not believe that the person acting is a partner.

Therefore, if a partner performs an act within his normal implied authority and the third party has no knowledge of internal restrictions, the firm may still be liable.

Emergency Authority of a Partner

Section 21 of the Indian Partnership Act provides additional authority to partners during emergencies.

A partner has authority to take necessary steps to protect the firm from loss during an emergency.

Such acts must be:

• Done in good faith.
• Performed with the intention of protecting the firm.
• Similar to actions that an ordinary prudent person would take in similar circumstances.

For example, if goods of the firm are at risk of destruction and a partner takes immediate steps to protect them, such action may bind the firm.

Difference Between Express Authority and Implied Authority

Important Case Laws On Implied Authority of Partner

K.D. Kamath & Co. v. Commissioner of Income Tax

The Supreme Court observed that mutual agency is an essential element of partnership. The ability of one partner to act on behalf of all partners distinguishes partnership from other forms of business relationships.

Premabhai Hemabhai v. T.H. Brown

The court recognised that a partner can bind the firm when acting within the scope of authority available to him.

Motilal Manucha v. Unnao Commercial Bank Ltd.

The court held that restrictions on a partner’s authority cannot affect third parties who are unaware of such restrictions.

Mathura Nath v. Bageshwari Rani

The court observed that where an act performed by a partner is connected with the nature of business carried on by the firm, such act may fall within implied authority.

State Bank of India v. Simko Engineering Works

The court recognised that implied authority is an inherent power of a partner unless the contrary is established through an agreement.

Ratification of Acts Beyond Implied Authority

Sometimes a partner may perform an act beyond his implied authority. Such an act can be subsequently approved or ratified by the other partners.

When ratification takes place:

• The act becomes binding on the firm.
• The partner’s original lack of authority may no longer affect the transaction.

However, ratification is possible only when the act itself is lawful.

Conclusion

Implied authority of a partner is an important principle under the Indian Partnership Act, 1932, based on the concept of mutual agency. Since every partner represents the firm, acts performed within the usual course of business bind the firm and other partners. However, this authority is not unlimited. 

Sections 19, 20, 21 and 22 define the scope, restrictions and consequences of a partner’s authority. The extent of implied authority depends upon the nature of business, commercial practices and circumstances of each case.