Liability of Firm for Acts of Partners

A firm is vicariously liable for the wrongful acts and misapplication of money or property committed by its partners when such acts are done in the ordinary course of the firm’s business or under the apparent authority of the partner. Sections 26 and 27 of the Indian Partnership Act, 1932 explain the circumstances in which a partnership firm becomes responsible for the acts of partners and the extent of such liability.

What Is Vicarious Liability of a Firm for Acts of Partners?

Vicarious liability refers to the legal responsibility of one person for the wrongful acts committed by another person because of a specific relationship between them. In partnership law, the relationship between a firm and its partners creates such liability.

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A partnership firm does not have a separate legal personality distinct from its partners under Indian law. Every partner acts as an agent of the firm and the other partners while carrying on the business of the firm. Therefore, acts performed by a partner within the scope of his authority may make the entire firm liable.

The liability of a firm for the acts of partners is based on the same principle that governs the liability of a principal for the acts of an agent. Since partners are considered agents of the firm under the Indian Partnership Act, wrongful acts committed by them during the course of business may bind the firm.

The liability generally arises in two major situations:

• When a partner commits a wrongful act or omission causing injury to a third person while acting in the ordinary course of the firm’s business.
• When a partner misapplies money or property belonging to a third person that has come into the possession or custody of the firm.

Liability of Firm for Wrongful Acts of Partners Under Section 26

Section 26 of the Indian Partnership Act, 1932 deals with the liability of a firm for wrongful acts committed by partners.

The section provides that where, by any wrongful act or omission of a partner acting in the ordinary course of the business of the firm, or with the authority of his partners, loss or injury is caused to any third party, the firm is liable to the same extent as the partner.

The term “injury” under Section 26 refers to injury caused by a tortious act. Therefore, the section primarily deals with the liability of a firm for the tortious acts of its partners.

For a firm to become liable under Section 26, the following conditions must be satisfied:

The Wrongful Act Must Be Done by a Partner

The liability under Section 26 arises only when the wrongful act is committed by a person who is a partner of the firm. Acts committed by an outsider or employee may involve different principles of liability.

The Act Must Be Connected With the Business of the Firm

The wrongful act must be committed during the course of the firm’s business. If a partner acts completely outside the business activities of the firm and without authority, the firm may not be held liable.

The Partner Must Act Within Actual or Apparent Authority

A partner may bind the firm not only through express authority but also through apparent authority. Apparent authority means the authority that a third person reasonably believes the partner possesses because of the position held by him in the firm.

When a partner acts within such authority, the firm becomes responsible for the consequences of that act.

Principle Behind Liability Under Section 26

The liability of a firm for the torts of a partner is based on the principle of agency.

Every partner is considered an agent of the firm for the purpose of carrying on its business. Therefore, acts done by a partner while representing the firm are treated as acts of the firm itself.

The position is similar to the relationship between a master and servant. A master may be held responsible for wrongful acts committed by a servant during employment. Similarly, a partnership firm may be held liable for wrongful acts committed by a partner while conducting partnership business.

However, the liability is not unlimited. The act must have a connection with the firm’s business and must fall within the scope of the partner’s authority.

Case Law: Venkat v. Natesa

In Venkat v. Natesa, (1939) I MLJ 905, the court examined the consequences of illegal acts committed by partners during partnership business.

In this case, N and K entered into a partnership for supplying goods to jails. K contributed finances for the partnership business, while N managed the operational work. During the business activities, K paid bribes to government officials and recorded those payments as expenses in the partnership accounts. N also used partnership funds for paying bribes.

Later, N filed a suit against K for dissolution of the partnership and settlement of accounts. K objected to including the amounts spent by N on bribery in the partnership accounts. Similarly, N objected to the amounts spent by K for illegal purposes.

The court held that neither partner was entitled to claim reimbursement from the partnership for money spent on illegal purposes. Expenses incurred for unlawful activities cannot be treated as legitimate partnership expenses.

The decision establishes that although partners may bind the firm through their acts, illegal acts do not create enforceable rights against the partnership.

Liability of Firm for Misapplication of Money or Property Under Section 27

Section 27 of the Indian Partnership Act, 1932 deals with the liability of a firm where a partner misuses money or property belonging to a third person.

The section protects third parties who deal with a partnership firm by making the firm responsible in certain situations where a partner misappropriates property received during business activities.

A firm becomes liable under Section 27 in the following circumstances:

Misapplication of Money or Property Received by a Partner

Where a partner receives money or property from a third person while acting within his apparent authority and misapplies it, the firm becomes liable.

The reason behind this rule is that the third person deals with the partner believing that the partner is acting on behalf of the firm. Since the partner receives the property due to the authority associated with his position, the firm must bear responsibility for the misuse.

Misapplication of Money or Property Received by the Firm

A firm is also liable when:

• money or property belonging to a third person is received by the firm during the course of its business; and
• any partner misapplies such money or property while it remains in the custody of the firm.

In such cases, the firm cannot avoid liability by claiming that only one partner committed the wrongful act.

When Is a Firm Not Liable for Misapplication by a Partner?

A firm may not be liable where the third person deals with a partner in an individual capacity and not as an agent of the firm.

If the circumstances show that the third person personally authorised a partner to act independently, the act may not be considered an act done on behalf of the firm.

Therefore, the important factor is whether the partner was acting as a representative of the firm or in a personal capacity.

Difference Between Liability Under Section 26 and Section 27

Liability of Dormant Partners for Acts of Firm

A dormant partner is a partner who does not actively participate in the business of the firm but remains a partner in the legal sense.

The liability of a dormant partner is similar to that of an active partner. Under Section 25 of the Indian Partnership Act, every partner is jointly and severally liable for acts of the firm.

Therefore, a dormant partner cannot avoid liability merely because he was not involved in daily business operations.

However, where another partner commits a wrongful act without the knowledge or participation of the dormant partner, the dormant partner may seek indemnification from the partner responsible for the loss.

Conclusion

The Indian Partnership Act, 1932 imposes liability on a firm for acts of partners because every partner represents the firm while carrying on partnership business. Sections 26 and 27 establish the principle that a firm must compensate third parties for wrongful acts, tortious conduct, and misapplication of property committed by partners within the scope of their authority.

However, liability depends upon the connection between the partner’s act and the business of the firm. Where a partner acts independently and outside the authority of the firm, the firm may not be responsible. The provisions ensure a balance between protecting third-party interests and limiting partnership liability to acts connected with the firm’s business.