Introduction

Exploring partner relations under the Indian Partnership Act, 1932 involves understanding how partners interact with third parties. The legal provision defines partners’ rights, duties, liabilities, and authority in external dealings. In this article, we delve into these crucial aspects, offering insights vital for partners and stakeholders.

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 purpose of the business of the firm.

Partner is agent :- Cox v. Hickman : If two or more agree that they should carry on a trade, and share the profits of it, each is a principal and each is an agent for other

Wallace Bros v. C.I.T. :- A partner transacts business for himself as principal, and also an agent for the other partners.

Janki Nath v. Dholkar Mal : One of the tests of partnership is whether there was a binding contract of mutual agency between the partners.

“The principle of agency does not carry with it a right to a reasonable remuneration for the work done. The reason is that, a patner has a dual capacity of principal and agent.”

(Reference for section 19 : Sec 22 :- Mode of doing act to bind 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.)

Section 19. Implied authority of partner as agent of the firm

1. Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his implied authority.
2. In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to-
3. submit a dispute relating to the business of the firm to arbitration,
4. open a banking account on behalf of the firm in his own name,
5. compromise or relinquish any claim or portion of a claim by the firm,
6. withdraw a suit or proceeding filed on behalf of the firm,
7. admit any liability in a suit or proceeding against the firm,
8. acquire immovable property on behalf of the firm,
9. transfer immovable property belonging to the firm, or
10. enter into partnership on behalf of the firm.

The implication of sub-section1 is that the most intelligent and prudent partner may be liable for the acts of an imprudent or a reckless partner provided that they are done in usual course of business. His want of knowledge or disapproval of such acts serve no purpose. If the act is outside the usual course of the business of the firm, it will not bind the firm even if it is prudent or has benefited the firm, unless it is ratified and approved by all the partners.

“Power to do usual does not include power to do unusual.”

Whether a particular act is done in the usual way of the business will depend upon the nature and kind of the business carried on by the firm.

Illustration :

A and B are partners. A with the intention of cheating B goes to a shop and purchases articles on behalf of the firm, such as might be used in the ordinary course of the partnership business, and converts them to his own separate use, there being no collusion between him and the seller. The firm is liable for the price of the goods.

Mathura Nath v. Sreejukta Bageshwari : Where a partner hired an elephant to trap wild elephants and one of the term was that the hirer should pay Rs. 5000/- if the elephant died during the period of hire, it was held that, the other partners were bound by that term.

Usage or Custom : The “usage of trade” is to be understood as referring to a particular usage to be established by evidence.(Sec 92(5) IEA).

“Custom of trade” refres to a general custom of merchants which has been ratified by decisions of courts and adopted as settled law.

What partners may generally do : Generally (with reference to section 22

i.e. Mode of doing act to bind 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.) partners may bind the firm by any of the following acts (in other words, following are implied authorities generally) :-

1. He may sell any goods or personal chattels of the firm

2. He may purchase on account of the firm any goods of a kind necessary for or usually employed in the business carried on by it.

3. He may receive payment of debts due to the firm, and give receipts. A release by one partner binds the firm.

4. He may engage servants for the partnership business.

5. He may accept, make and issue bills and other negotiable instruments in the name of the firm.

6. May borrow money on the credit of the firm

7. May for the purpose of borrowing money, pledge any goods or personal chattels belonging to the firm.

8. May hire on the credit of the firm any goods of a kind used in its business.

Fraudulent Act of Partner : It is a well established rule of law that a principal is answerable for the acts of his agent, including the agents fraudulent acts, provided that they fall within the scope of his authority.

(please refer section 238 of ICA). The same principal applies to partners and for the same reason, a firm cannot escape liability.

But, this rule does not apply in cases where there is collusion between such partner and the third party. There is a presumption that, the third party is acting bona fide and has no knowledge of the fraud.

What a partner cannot do : Section 19(2) :

submit a dispute relating to the business of the firm to arbitration,

open a banking account on behalf of the firm in his own name,

compromise or relinquish any claim or portion of a claim by the firm,

withdraw a suit or proceeding filed on behalf of the firm,

admit any liability in a suit or proceeding against the firm,

acquire immovable property on behalf of the firm,

transfer immovable property belonging to the firm, or

enter into partnership on behalf of the firm.

20. Extension and restriction of partners implied authority

The partners in a firm may, by contract between the parties, extend or restrict the implied authority of any partner. Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.

Restriction of authority : A third party is not affected by a secret limitation of a partners implied authority, unless he has actual notice of it. The reason for this rule is that a third party is entitled to assume that all the partners have full implied authority.

Section 21. Partners 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.

In such case, the firm shall indemnify partner. (Refer section 13(e)).

A similar authority to act in an emergency is given to an agent by section 189 of Indian Contract Act.

(Sec.189 of ICA : Agent’s authority in an emergency.—An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case under similar circumstances.).

So even in absence of section 21 as aforesaid, a partner would be able to claim the protection as stated in section 189.

Section 22 :- Mode of doing act to bind 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.

Devji v. Maganlal : Where a partner took some premises on lease in his own name, it was held that, he did not intend to act on behalf of the firm nor he intend to bind the firm.

Suwalal v. Fazle Hussain : Where a managing partner executes a surety bond and from the terms thereof it appears that he clearly meant to act on behalf of the firm, the other partners become liable.

Relation between section 19 and 22 :

Porbandar Commercial Bank Ltd. v. Bhanji Lavji : A partner signing as a surety on behalf of his firm cannot bind the other partners of the firm to answer the clim of the creditor who can make the signatory partner liable as a surety. This view was expressed by the Gujrat High Court, where it was not the usualcourse of business of the respondent firm to execute any surety contract for the benefit of third parties when they become the debtor.

Section 23. Effect of admissions by a partner :

An admission on representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business.

A partner’s admission is at most evidence against all the partners of the firm and such evidence it may affect them more or less. (Stead v. Salt).

“Of course a partner cannot increase his authority to bind the firm by any statement of his own about it.”

Section 24 : Effect of notice to acting partner :

Notice to a partner, who habitually acts in the business of the firm of any matter 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 that partner.

This section has reference to section 229 of ICA (Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal.)

Since partnership is a form of agency, this rule applies to partnership also i.e., “notice to an agent is equivalent to a notice to the principal.

Rampal Singh v. Balbhaddar Singh : The agency extends to receiving notice on behalf of his principal of whatever is material to be stated in the course of the preceedings.

Ashutosh v. State of Rajasthan : The SC court observed that, with reference to a partnership, notice to a principal is notice to all his agents and notice to an agent in matters connected with his agency is notice to his principal.

Section 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.

(Reference section 2(a) : an “act of a firm” means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm;)

(Reference section 18 : Subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm.)

The rule laid down in this section flows from the rule laid down in section 18. The condition that the acts shall have been done while he is a partner is very material so that, any act done prior to, or subsequent to, his becoming or ceasing to be the partner will not bind him.

Ashutosh v. State of Rajasthan & Ors. :

Under section 25, the liability of partners is joint and several. It is open to a creditor of the firm to recover the debt from any one or more of the partners. Each partner shall be liable as if the debt of the firm has been incurred on his personal liability.

Section 25 provides that every partner is liable, jointly with all other partners and also severally for all acts of the firm done while he is a partner. A firm does not have any existence away from its partners. A decree in favour of or against a firm in the name of firm does not have any existence away from its partners. Consequently, property belonging to the partners could be proceeded against for recovery of dues on account of Sales tax assessed against the partnership firm under the provisions of the Karnataka Sales Act, 1957 (Dena Bank V. Bhikhabhai Prabhudas Parekh & Co. and Ors.).

Income Tax Officer (III), Circle-I, Salem v. Arunagiri Chettiar :

Section 25 of the Partnership Act does not make a distinction between a continuing partner or erstwhile (former/old) partner. Its principle is clear and specific, viz., that every partner is liable for all the acts of the firm done while he is a partner jointly along with other partners and also severally. Therefore, it cannot be held that the said liability ceases merely because a partner has ceased to be partner subsequent to the said period.

Section 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 therefor to the same extent as the partner.

The principle of this section is that, everyone must answer for the acts and defaults of his servants or agents in the course of their employment. This section refers to tortious acts. The word injury implies a ‘tort’. The liability of a firm for the torts of a partner rests precisely the same principles as the liability of a master for the torts of his servant.

In Hamlyn v. Houston, one of two partners without the knowledge of his co-partner by bribery induced a clerk of the plaintiff, a competitor in trade, in breach of duty to his employer to divulge confidential information in regard to the plaintiff’s business. It was in the ordinary course of the business of the firm to obtain such information by legitimate methods, and partner acted in the interests of the firm. Both partners were held liable to the plaintiff.

Section 27 : Liability of firm for misapplication by partners :

• a partner acting within his apparent authority receives money or property from a third party and misapplies it, or
  • a firm in the course of its business receives money or property from a third party, and the 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.

  Difference between sub-section (a) & (b) : Under the first paragraph the receipt and misapplication of the money or property must be by the same partner before it reaches the firm ; whereas under the second paragraph the firm receives money or property and the money and property so received is misapplied by any of its members. In both the cases, the firm is liable to make good the loss.

  Section 28. Holding out :

  (1) Anyone who by words spoken or written or by conduct represents himself or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to any one who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

  (2) Where after a partners death the business is continued in the old firm name, the continued use of that name or of the deceased partners name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.

  (Reference section 235 of ICA : Liability of a ‘pretended agent’.

  This section is based on the well known principle of estoppel. It imposes liability on two distinct classes of persons viz; (i). a person who is not partner. (ii) a person who may be an ex-partner who suffers the other partners to represent that the ex-partner continues to be the partner. The result is that, he is held liable to such persons as if he were a partner.

  It is not necessary to show that the statement or conduct which amounts to holding out was wilful or fraudulent as the section does not use such an expression. The determining element is not the knowledge of the party making it but the effects of the representation as having caused another to act on the faith of it (Sarat Chandra v. Gopal Chandra).

  Mollow, March & Co. v. Court of Wards : Where a man holds himself out as a partner, or allows others to do it he is then properly estopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. A man so acting may be rightly held liable as a partner by estoppel.

  Tulsidas v. Lyon Lord & co. : Mere fact that a person’s name is used in the firm name does not make that person a partner of the firm. There can be no liability if a person is represented as a partner without his knowledge and assent.

  Effect of holding out : If a person holds himself out to be the partner of a firm, he becomes personally liable. He does not therefore become a partner in the firm; and is not entitled to any rights as against those who are in fact partners in the firm.

  The doctrine of holding out which is a part of the law of estoppel would not apply to anything done or any credit given after the death of the person making the representation.

  Section 29. Rights of transferee of a partners interest

  (1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by 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 account 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 the dissolution.

  The effect of the section is that a partner may transfer his share to a third person, absolutely or by way of security, but cannot make the transferee a partner, unless the other partners recognize the transferee as a partner. (Mangilal v. Bhanwarlal).

  This section is subject to the terms of the partnership agreement,

  and if a partner has an unconditional right to transfer his share, he is relieved from liability as between himself and his co-partners in respect of the transaction subsequent to the transfer and notice thereof given to him (Jefferys v. Smith).

  Purchase of share by partner : A transfer of his interest by one partner to another, where there are only two partners, operates as a dissolution (Health v. Sansom).

  One of the several partners may purchase the share of another for his own benefit, and not for the benefit of the firm. (Cassels v. Stewart).

  What transferee cannot do : A transferee of a partner’s interest is not entitled, during the continuance of the partnership,

  1. To interfere in the conduct of the business, or
     1. To require accounts, or
     1. To inspect the books of the firm, or
     1. To challenge the accounts of profits agreed to by the partners;
     1. Cannot sue for dissolution or for account before dissolution.

     Mangilal v. Bhanwarlal : It is only if and when dissolution occurs that transferee would be entitled as against the remaining partners to ask for account as from the date of dissolution and to receive his share of assets to which transferring partner was entitled.