Relations of partners to third parties

1. Partner as agent of the firm: section 18

Subject to the Act, a partner is the agent of the firm for the purposes of the business of the firm. Being also a principal, he is bound by what his co-partners do. This is the mutual agency that section 4 requires, seen from the outsider's side.

2. Implied authority: section 19

Section 19(1): the act of a partner done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. This authority is called his implied authority. It depends on what is usual in that trade, not on what the partners have privately agreed. A partner in a trading firm may buy and sell goods, receive payment, give receipts, borrow for the business and engage servants.

Section 19(2): in the absence of a usage or custom of trade to the contrary, implied authority does not empower a partner to:

• (a) submit a dispute relating to the business of the firm to arbitration;
• (b) open a banking account on behalf of the firm in his own name;
• (c) compromise or relinquish any claim or portion of a claim by the firm;
• (d) withdraw a suit or proceeding filed on behalf of the firm;
• (e) admit any liability in a suit or proceeding against the firm;
• (f) acquire immovable property on behalf of the firm;
• (g) transfer immovable property belonging to the firm; or
• (h) enter into partnership on behalf of the firm.

3. Extension and restriction: section 20

The partners may by contract extend or restrict the implied authority of any partner. But an act done by a partner within his implied authority binds the firm despite a restriction, unless the person dealing with him knows of the restriction, or does not know or believe him to be a partner. A secret limit in the deed does not protect the firm against an outsider without notice.

4. Authority in an emergency: section 21

A partner has authority in an emergency to do all such acts for 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. The firm must also indemnify him (section 13(e)).

Sections 22 to 24 complete the picture: to bind the firm, the act must be done in the firm name or in a manner showing an intention to bind it (section 22); an admission by a partner about the firm's affairs, made in the ordinary course of business, is evidence against the firm (section 23); and notice to a partner who habitually acts in the business is notice to the firm, except in the case of a fraud on the firm committed by or with that partner (section 24).

5. Liability of partners: section 25

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. The creditor may sue all the partners together or any one of them for the whole debt, and may recover from a partner's private assets. The partner who pays can then claim contribution from the others. Liability is unlimited; the Act has no limited partner (limited liability is available only under the Limited Liability Partnership Act, 2008, a separate statute).

6. Wrongful acts: section 26

Where, by the 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 a third party or a penalty is incurred, the firm is liable to the same extent as the partner. So a partner of a transport firm who negligently drives the firm's lorry on the firm's work makes the firm liable to the injured person. A partner who assaults a customer over a private quarrel does not.

7. Misapplication of money or property: section 27

The firm must make good the loss:

• (a) where a partner, acting within his apparent authority, receives money or property from a third party and misapplies it; and
• (b) where the firm, in the course of its business, receives money or property from a third party, and it is misapplied by any partner while it is in the custody of the firm.

A partner of a firm of advocates who collects money for a client and pockets it falls under clause (a). If the money was deposited with the firm and later taken by a partner, clause (b) applies.

8. Holding out: section 28

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 to anyone who has on the faith of that representation given credit to the firm, whether or not the person making the representation knows that it reached the person who gave credit. Section 28(2) adds that where the business is continued in the old firm name after a partner's death, the use of the name does not make his legal representative or estate liable for acts done after his death.

The rule rests on estoppel. It needs (i) a representation, (ii) made by or with the knowledge of the defendant, and (iii) credit given on the faith of it. A retired partner who does not give public notice can be caught by it, as the English case Tower Cabinet Co. v. Ingram (1949) shows from the other side: the retired partner escaped because the creditor had never dealt with the firm before and did not know of him as a partner, and the use of old notepaper bearing his name had not been with his authority.

9. Transferee of a partner's interest: section 29

A partner may transfer his interest, absolutely or by mortgage, but the transferee does not become a partner. While the firm continues he is not entitled to interfere in the conduct of the business, to require accounts or to inspect the books. He is entitled only to receive the share of profits of the transferring partner and must accept the account of profits agreed to by the partners. On dissolution, or on the transferor ceasing to be a partner, he is entitled to the transferor's share of the assets and, for ascertaining it, to an account from the date of dissolution.

10. Minor admitted to the benefits: section 30

• A minor cannot be a partner, but may, with the consent of all the partners for the time being, be admitted to the benefits of partnership (s.30(1)).
• He is entitled to the agreed share of property and profits and may inspect and copy the accounts (s.30(2)).
• His share is liable for the acts of the firm, but he is not personally liable (s.30(3)).
• He cannot sue the partners for accounts or his share except when severing his connection with the firm (s.30(4)).
• Within six months of attaining majority, or of obtaining knowledge that he had been admitted, whichever is later, he must give public notice whether he elects to become or not to become a partner. If he gives no notice, he becomes a partner on the expiry of the six months (s.30(5)).
• If he becomes a partner, he is personally liable for all acts of the firm done since he was admitted to the benefits (s.30(7)). If he elects not to, his share is not liable for acts after the date of the notice (s.30(8)).

The Supreme Court in Commissioner of Income-tax v. Dwarkadas Khetan & Co., 1960 INSC 235, AIR 1961 SC 680, applied the rule that a minor cannot be a full partner and can only be admitted to the benefits of an existing partnership with the consent of the adult partners.

11. Problem

A, B and C are partners in a grocery business. The deed says no partner shall borrow more than Rs 50,000 without the consent of the others. A borrows Rs 2 lakh from a bank in the firm name for the business. The bank did not know of the clause. A also agrees, in the firm name, to buy a shop building. Is the firm bound?

Issue. Whether the loan and the building purchase are within A's implied authority, and the effect of the internal restriction.

Law. Section 19(1): acts done in the usual way of business of the kind carried on bind the firm. Section 20: a restriction does not affect an outsider without notice. Section 19(2)(f): implied authority does not extend to acquiring immovable property.

Application. Borrowing for the business is usual in a trading firm, and the bank had no notice of the Rs 50,000 limit. Buying a building is excluded by section 19(2)(f) unless there is a usage of trade allowing it, and none is suggested.

Conclusion. The firm is bound by the loan, and all partners are jointly and severally liable for it (section 25); B and C can recover their loss from A for breach of the deed. The firm is not bound by the building contract unless B and C ratify it.

How this is examined

Essay questions: “Explain the implied authority of a partner”, “Discuss the liability of a firm for the acts of its partners”, or “Explain the position of a minor in a partnership firm.” Short notes: holding out, rights of a transferee of a partner's interest, section 27. Problems on the restricted-authority clause and on the minor who stays silent after majority are common.