Relation of Partners to Third Parties under Partnership Act

The relation of partners to third parties under the Indian Partnership Act, 1932 explains how partners can bind the firm through their acts and when partners become personally liable for obligations arising from the firm’s business. Since a partnership is based on mutual agency, every partner acts as an agent of the firm and other partners while carrying on partnership activities.

What Is The Relation of Partners to Third Parties?

The relation of partners to third parties refers to the legal rights, duties, and liabilities that arise between partners of a firm and persons dealing with the firm. These provisions are mainly covered under Sections 18 to 30 of the Indian Partnership Act, 1932.

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The foundation of this relationship is the principle of mutual agency. A partnership firm operates through its partners, and every partner has the authority to act on behalf of the firm for carrying on its business. Therefore, an act done by one partner within the scope of his authority may create rights and liabilities for all partners.

The law of partnership is closely connected with the law of agency because a partner occupies a dual position:

• A partner acts as a principal because he has an interest in the business and shares profits and losses.
• A partner acts as an agent because he can represent and bind the firm through his actions.

This principle ensures that third parties dealing with a partnership firm can rely on the authority of partners acting in the ordinary course of business.

Partner As An Agent of The Firm Under Section 18

Section 18 of the Indian Partnership Act, 1932 provides that:

“A partner is the agent of the firm for the purpose of the business of the firm.”

This means that every partner has the authority to represent the firm and perform acts necessary for conducting the firm’s business. However, this agency relationship exists only for partnership business and not for personal acts of a partner.

For example, if a partner borrows money for the business of the firm, the firm may become liable for repayment. However, if the partner borrows money for a personal purpose, such as purchasing personal property or meeting personal expenses, the firm will not be responsible.

The principle of mutual agency was explained in Cox v. Hickman (1860), where it was observed that every partner is both a principal and an agent of other partners. Each partner is bound by acts performed by another partner in carrying on the partnership business.

In Agricultural Insurance Co., In Re (1870), it was recognised that every partner is an unlimited agent of other partners in matters connected with partnership business.

Thus, the authority of a partner depends upon whether the act is connected with the business of the firm.

What Is Implied Authority of A Partner Under Section 19?

Implied authority refers to the authority that a partner automatically possesses to perform acts that are necessary for carrying on the usual business of the firm.

Section 19(1) states that an act done by a partner to carry on the business of the kind carried on by the firm in the usual manner binds the firm.

The authority given under Section 19 is also known as:

• Ordinary authority.
• Apparent authority.
• Ostensible authority.

For an act to bind the firm under implied authority, the following conditions must be satisfied:

• The act must relate to the business carried on by the firm.
• The act must be performed in the usual manner of such business.
• The act must be done on behalf of the firm.

For example, a partner of a trading firm purchasing goods on credit for business purposes will bind the firm because such transactions are part of ordinary business activities.

In Bank of Australia v. Breillat, it was observed that every partner is considered a general agent of the partnership and can bind other partners in matters within the scope of partnership business.

What Acts Are Outside The Implied Authority of A Partner?

Although partners have wide authority, Section 19(2) places restrictions on certain acts. Unless there is a trade custom or express authority, a partner cannot perform the following acts on behalf of the firm:

• Submit disputes relating to the firm’s business to arbitration.
• Open a bank account in his own name on behalf of the firm.
• Compromise or abandon any claim of the firm.
• Withdraw legal proceedings filed by the firm.
• Admit liability in a legal proceeding against the firm.
• Acquire immovable property on behalf of the firm.
• Transfer immovable property belonging to the firm.
• Enter into a partnership on behalf of the firm.

These restrictions protect the interests of other partners because such acts may significantly affect the rights and obligations of the firm.

Can Partners Extend Or Restrict Authority Of A Partner?

Yes, partners can extend or restrict the implied authority of a partner through an agreement under Section 20 of the Indian Partnership Act, 1932.

A partnership agreement may provide that a particular partner cannot perform certain acts or may require approval from other partners before taking important decisions.

However, such restrictions generally operate internally between partners. A third party dealing with the firm will not be affected by such restrictions unless the third party has knowledge of them.

For example, if a partnership deed prevents a partner from purchasing goods, but a supplier dealing with the firm is unaware of this restriction, the firm may still be liable for the purchase.

What Is Partner’s Authority In Emergency Under Section 21?

Section 21 provides special authority to partners during emergency situations.

A partner can perform acts beyond ordinary authority if:

• There is an emergency situation.
• The act is performed to protect the firm from loss.
• The act is something a person of ordinary prudence would do in similar circumstances.

The purpose of this provision is to protect the business of the firm from immediate damage.

However, emergency authority does not give unlimited powers to partners. In Hawtayne v. Bourne, it was held that an agent who does not have authority to borrow money cannot automatically acquire such power merely because of an emergency.

How Does A Partner’s Act Bind The Firm Under Section 22?

Section 22 explains the manner in which an act performed by a partner can bind the firm.

An act will bind the firm when:

• It is done in the name of the firm; or
• It is done in a manner showing an intention to bind the firm.

The purpose of this section is to ensure that third parties can identify whether a partner is acting for himself or for the partnership.

In Devji v. Magan Lal, the Supreme Court held that where a partner entered into a transaction in his own name without any intention to bind the firm, the firm was not liable.

Similarly, in Punjab Bank v. Muhammad, a partner signing a document as proprietor instead of as a partner did not make the firm liable.

Effect of Admissions Made By A Partner Under Section 23

An admission or representation made by a partner regarding the affairs of the firm becomes evidence against the firm if it is made during the ordinary course of business.

For Section 23 to apply:

• The statement must relate to the affairs of the firm.
• It must be made by a partner.
• It must be made during ordinary business activities.

Since partners are agents of the firm, their statements regarding partnership matters can affect the firm.

In Bengal National Bank Ltd. v. Jatindra Nath Mazumdar, it was held that admissions relating to contracts, payments, and business transactions made by a partner can be used as evidence against other partners.

Effect of Notice Given To An Acting Partner Under Section 24

Section 24 provides that notice given to a partner who habitually acts in the business of the firm operates as notice to the firm.

This principle is based on agency law because notice to an agent regarding matters connected with agency is treated as notice to the principal.

The requirements are:

• Notice must be actual notice.
• It must be given to an acting partner.
• It must relate to the affairs of the firm.
• The partner receiving notice must not commit fraud against the firm.

A notice given to a dormant or sleeping partner generally does not bind the firm because such partner does not participate in business activities.

Liability of Partners

Liability of Partners For Acts of The Firm Under Section 25

Section 25 establishes the principle of joint and several liability of partners.

It provides that every partner is liable jointly with other partners and individually for all acts of the firm performed while he is a partner.

A partnership firm does not have a separate legal existence independent of its partners. Therefore, liability of the firm becomes the liability of its partners.

The consequences of joint and several liability are:

• A creditor can recover the entire amount from any partner.
• A partner cannot escape liability by claiming that another partner performed the act.
• Liability continues for acts done during the period of partnership.

In Ashutosh v. State of Rajasthan, the Supreme Court observed that each partner can be held liable as if the firm’s debt was his personal liability.

Liability of Firm For Wrongful Acts of A Partner Under Section 26

Section 26 deals with liability of a firm for wrongful acts committed by partners.

A firm becomes liable when:

• The wrongful act is committed by a partner.
• The act is done in the ordinary course of business.
• The act causes loss or injury to a third party.

This principle is based on vicarious liability. Since partners manage the firm’s business, the firm bears responsibility for wrongful acts connected with that business.

For example, if a partner of a law firm provides negligent legal advice to a client during professional work, the firm may also become liable.

Liability of Firm For Misapplication By Partners Under Section 27

Section 27 deals with situations where money or property belonging to a third party is misused by a partner.

The firm becomes liable in two situations:

Money Received By Partner Under Authority

If a partner receives money or property from a third party while acting within his apparent authority and misuses it, the firm is responsible.

Money Received By Firm

If the firm receives money or property during business activities and a partner misuses it while it remains under the firm’s custody, the firm must compensate the loss.

In Rhodes v. Moules, liability was imposed because receiving such property was within the partner’s apparent authority.

What Is Holding Out Under Section 28?

Holding out means a situation where a person represents himself, or knowingly allows himself to be represented, as a partner of a firm and a third party relies on such representation.

Such a person becomes liable as a partner even though he may not actually be a partner.

The essential elements of holding out are:

• Representation that the person is a partner.
• Reliance by the third party.
• Credit given based on such representation.

In Beaven v. National Bank Ltd., a person who allowed his name to appear in the firm name was held liable because it created an impression that he was a partner.

The principle of holding out is based on the doctrine of estoppel.

Rights of Transferee of Partner’s Interest Under Section 29

A partner may transfer his interest in the firm, but the transferee does not automatically become a partner.

During continuation of the firm, the transferee:

• Cannot interfere in management.
• Cannot inspect accounts.
• Can only receive the transferring partner’s share of profits.

After dissolution of the firm, the transferee can claim the share of assets belonging to the transferring partner.

Can A Minor Become A Partner Under Section 30?

A minor cannot become a partner because partnership is created through a contract, and a minor is not competent to enter into a contract.

However, under Section 30, a minor may be admitted to the benefits of partnership with the consent of all existing partners.

Rights of a minor admitted to partnership benefits include:

• Right to receive a share of profits.
• Right to inspect partnership accounts.
• Right to access partnership records.

However, the minor is not personally liable for acts of the firm. Only the minor’s share in the partnership property is liable.

After attaining majority, the minor must decide within six months whether to become a partner or not.

If the minor becomes a partner:

• Personal liability begins.
• Liability extends to acts done after admission to partnership benefits.

If the minor refuses:

• Rights and liabilities remain limited as a minor.
• Share in profits and property can be claimed.

In Commissioner of Income Tax v. Dwarkadas Khetan & Co., the Supreme Court clarified that a minor can only be admitted to partnership benefits and cannot become a full partner.

Conclusion

The relation of partners to third parties under the Indian Partnership Act, 1932 is primarily based on the principle of mutual agency. Since every partner acts as an agent of the firm, acts performed within the authority of partnership business can create obligations for all partners. 

Sections 18 to 30 establish rules regarding authority, liability, admissions, holding out, transfer of interest, and rights of minors. These provisions ensure protection of third parties while balancing the rights and responsibilities of partners within a firm.

Note: This article was originally written bySunita Basak (University of Engineering and Management, Kolkata) and published on 12 February 2021. It was subsequently updated by the LawBhoomi team on 24 July 2026.