Relation of Partners to Third Parties under Partnership Act

The relation between partners on the one hand and the third parties on the other is founded on the principle contained in Section 18, which reads as under:

Section 18- Partner to be agent of the firm:

Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm. For the purposes of the business of the firm, a partner is an agent of the firm. It means that a firm, i.e., all the partners of the firm are bound by the act of a partner as any principal would be bound by the act of his agent. Mutual agency between the partners is one of the essentials to create partnership. Every partner having the capacity to act as firm’s agent, the act done by any partner renders the whole firm liable towards a third party. Law of partnership is generally stated as a branch of the law of principal and agent.

Relations of partners to third parties are thus founded on the principle of mutual agency between the partners. According to Mr. Justice Story[1], “Every partner is an agent of the partnership, and his rights, powers, duties and obligations are in many respects governed by the same rules and principles as those of an agent; a partner virtually embraces the character of both a principal and agent.”

 It has been observed by Lord Wensleydale[2] : “A man who allows another to carryon trade, whether in his own name or not, to buy and sell, and to pay over all the profits to him, is undoubtedly the principal, and the person so employed is the agent, and the principal is liable for the agents contracts in the course of his employment. So if two or more persons agree that they should carry on a trade and share the profits of it, each is a principal, and each is an agent for the other, and each is bound by the other contract in carrying on the trade, as much as a single principal would be by the act of an agent, who was to give the whole of the profits to his employer.”

A partner is an agent of the firm. This agency is only for the purposes of the business of the firm. He can enter into contracts, purchase and sell goods, borrow money and do similar acts in so far as they are necessary for the carrying on of the business of the firm and the firm will be bound by every such act. If he, on the other hand, does an act unconnected with the business of the firm, e.g., purchases materials for the construction of his own building or borrows money for his daughter’s marriage, the firm will not be bound by that a she is not firm’s agent for that purpose.

Sections 18 to 30 of the Indian Partnership Act contain provisions concerning the relations of partners to third parties. These provisions have been classified and discussed under the following subheads:

1. Nature and extent of liability of the Firm for the acts of a partner (Ss 18-27);
2.  Doctrine of Holding Out, creating the liability of a Non-partner. (S 28);
3.  Rights of transferee of a partner’s interest (S 29); and
4.  Position of a ‘Minor’ admitted to the benefits of partnership (S 30).

I. NATURE AND EXTENT OF LIABILITY OF THE FIRM FOR THE ACTS OF A PARTNER (Ss 18-27)

The question of liability of the firm for the acts of a partner is being discussed under the following sub-heads: A. Nature of liability of the partners towards third parties, and

B. The kind of acts for which the partners are liable which are as follows:

i. Liability for the acts done within the authority of a partner (Ss 18, 19, 20 and 22). Such authority may be either express or implied authority.

ii. Liability when a partner acts in emergency (S 21).

iii. Liability on ratification of a partner’s act.

iv. Liability for admission made by a partner (S 23).

v. Liability on notice to an acting power (S 24).

vi. Liability for torts and wrongful acts (S 26).

vii. Liability for misapplication of money or property (S 27).

A. Nature of liability of the partners towards third parties (S 25)

S 25 contains the following provision to explain the nature of liability of the partners of a firm: 25. Liability of a partner for acts of the firm. – Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. A principal is liable for the act of his agent done by him on his behalf. According to s 18, it has been noted above, a partner is an agent of the firm for the purpose of the business of the firm. Obviously, therefore, the whole of the firm, which means all the partners of the firm become liable for an act of the firm done by any partner. As regards the nature of liability of the partners, S 25 states that every partner is jointly and severally liable for all acts of the firm done while he is a partner.

In M/s Glorious Plastics Ltd v Laghate Enterprises[3], it was held that if a partner retires on 1st April 1982 and the act of the firm is done on 1st March 1985, s 25 cannot be applied to make such retiring partner liable for an act done after he has retired. The liability of all the partners is joint and several even though the act of the firm may have been done by one of them. Thus a third party, if he so likes, can bring an action against any one of them severally or against any two or more of them jointly.

B. The kind of acts for which the partners are liable

1) Acts done within the authority of a partner (Ss 18, 19, 20 and 22): A partner being an agent of the firm, his acts bind the firm provided that the partner is acting within the authority vested in him. As in the contract of agency, the authority of the partner may also be either express or implied.

Express Authority: An authority is said to be express when it is given by words spoken or written.

Implied Authority: An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case. For instance, A is authorised to recover Rs. 5,000 from B. In this case A has the implied authority to file a suit for the recovery of the amount.

Mode of exercising authority (S 22) S 19 (1) which defines implied authority, is subject to the provisions of s 22. In order to bind the firm, the act of a partner must be done in a manner mentioned in s 22. The provision is as follows:

 Section 22: Mode of doing act to bind the firm

In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm.

According to the provision contained in s 22, for an act falling within the implied authority of a partner, the firm will be bound if the act or instrument done or executed by a partner has been done or executed

1. in the name of the firm; or ii. in a manner expressing or implying an intention to bind the firm.

2) Partner’s authority in an emergency (S 21) Sometimes even if a partner does not have either express or implied authority to act on behalf of the firm, his act can bind the firm if the same has been done in a situation of emergency as described in s 21.

The section reads as under:

Section 21- Partner’s authority in an emergency

A partner has authority in an emergency to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm.

3) Ratification of a partner’s act: When an agent does an act on behalf of a principal but without the principal’s prior authority, the principal may grant subsequent approval to such an act i.e., ratify the same. If the principal ratifies the act, the same effects follow as if the act had been performed with his prior authority.

4) Admission made by a partner (S 23): According to s 23, an admission or representation made by a partner concerning the affairs of the firm is an evidence against the firm, if it is made in the ordinary course of business. This is so because every partner is the agent of the firm for the firm’s business. For example, admission by one partner regarding making of a contract, execution of a document, payment of money, supply of goods or financial condition of the firm, will be evidence against all the other partners. It is, of course, necessary that such admission or representation must have been made in the ordinary course of business. Similarly, representations made by a partner also have the same effect. However, evidence can be given to disprove such admissions or representations made by a partner as they do not constitute conclusive proof of the matters admitted or represented.

5) Effect of notice to an acting partner (S 24) According to s 24: “Notice to a partner who habitually acts in the business of the firm of any matters relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of the partner.”

6) Liability for torts and wrongful acts (S 26) A principal is vicariously liable for the torts and other wrongful acts committed by his agent in the course of the business of agency.25 Every partner being an agent of the firm for the business of the firm, the same principle has been recognised by the Indian Partnership Act also. S 26 contains the following provision in this regard: 26. Liability of the firm for wrongful acts of a partner. – Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party or any penalty is incurred, the firm is liable there for to the same extent as the partner.

In Hurruck Chand v Gobind Lal,[4] one of the partners, who was an active partner in a firm, knowing that the goods were stolen ones, purchased and sold them without the knowledge of the other partner who was a sleeping partner. It was held that both the partners were liable for the tort of conversion to the owner of the goods.

7) Liability for misapplication of money or property by a partner (S 27) S 27 recognizes the liability of the firm for a particular kind of wrong done by a partner, i.e., misapplication of money or property. The provision is as follows: 27. Liability of the firm for misapplication by partners.- Where- (a) a partner acting within his apparent authority receives money or property from a third party and misapplies it; or (b) a firm in the course of its business receives money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.

II. THE DOCTRINE OF HOLDING OUT (S 28):

Every partner is liable for all acts of the firm done while he is a partner. Therefore, generally a person who is not a partner in the firm cannot be made liable for an act of the firm. In certain cases, however, a person who is not a partner in the firm may be deemed to be a partner for the purpose of his liability towards a third party. The basis of liability of such a person is not that he was himself a partner or was sharing the profits or was taking part in the management of the business, but the basis is the application of the law of estoppel because of which he is held out to be a partner or is deemed to be a partner by holding out.

III.RIGHTS OF TRANSFEREE OF PARTNER’S INTEREST (S 29)

The relation of partners is based upon mutual confidence and trust and obviously, therefore, no person may be introduced as a partner in the firm without the consent of all the existing partners.[5] It follows that no partner can assign his share in a way which may substitute an outsider in his place. If any partner transfers the whole of his interest in the firm to a third party, the other partners may apply to the court for the dissolution of the firm.[6] It is, however, possible that a partner may transfer his interest in the business in favour of a third person. S 29 contains the following provision with regard to the rights of the transferee of a partner’s interest:

Section 29: Rights of transferee of a partner’s interest

(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation of him of a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the accounts of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners to receive the share of the assets of the firm to which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as from the date of dissolution. S 29 (1) deals with the position during the continuance of the firm whereas the position of the dissolution of the firm or the transferring partner ceasing to be a partner is contained in s 29 (2).

 During the continuance of the firm, the transferee of a partner’s interest does not become entitled to interfere in the conduct of the business of the firm. Nor can such a transferee require accounts, nor can he inspect the books of the firm. He is bound to accept the account of profits agreed to by the partners. His only right is to receive the share of profits of the transferring partner. The reason why the transferee is not entitled to interfere in the conduct of the business is that partnership being based on mutual confidence and trust between the partners, there should be no interference by any outsider.

Position of a minor admitted to the benefits of partnership (S 30) 30. Minors admitted to the benefits of partnership:

(1)As already noted, in order to create a partnership between a number of persons, they must have entered into a contract to that effect,[7] and that the relation of partnership arises from contract and not from status.[8] That obviously implies that all the essentials of a valid contract are to be satisfied and, therefore, all the partners must be competent to contract. A minor is incompetent to contract, his agreement is void and, therefore, he is incapable of becoming a partner in any partnership firm.[9] If, while creating partnership, a minor is made a full-fledged partner in a partnership firm, the deed would be invalid and the document cannot be enforced even vis-a-vis other partners.

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[1] Story on Partnership, S 1

[2] Cox v Hickman (1860) 8 HLC 268.

[3] AIR 1993 Bom. 224.

[4] (1906) 10 CWN 1053.

[5] S 31 (1).

[6] S 44 (e).

[7] S 4.

[8] S 5.

[9] Ss 10, 11, Indian Contract Act.

This article is contributed by Sunita Basak is a student at University of Engineering and Management, Kolkata.