RELATION BETWEEN PARTNERS, ON ONE HAND AND THIRD PARTIES, ON THE OTHER

Section 18 of the Indian Partnership Act, 1932, contains the principal on which the relation between partners on one hand and third parties on the other, is founded. According to this concerned section, for the business of the firm, a partner is an agent of the firm. All the laws applicable on an agent is also applicable on a partner. It means that all the partners of the firm, even the sleeping or dormant partners, are bound by the act of the agent. But here it is to be noted that a partner is not bounded for the acts another partner does in his individual capacity.

NATURE AND EXTEND OF LIABILITY OF THE FIRM FOR ACTS OF A PARTNER

This includes:

A. Nature of liability of partners towards third party (Section 25)

As already mentioned in the Section 18, all the partners become liable for an act of the firm done by any partner. The nature of this liability is stated in Section25. According to Section 25 of the Indian Partnership Act, 1932, every partner is jointly and severally liable for all the acts of the firm done while he is a partner. No partner has limited liability in a firm.

B. Kinds of act for which partners are liable

1. LIABILITY FOR THE ACTS DONE WITHIN THE AUTHORITY (EXPRESS OR IMPLIED) OF A PARTNER (SECTION 18, 19, 20, 22)

According to Section 18, a partner is an agent of the firm. His acts bind the firm, provided he is acting with the authority vested in him. This authority can be either expressed or implied.

An authority is said to be express when it is given by words, spoken or written. Where as, according to Section 19(1) of Indian Partnership Act, 1932, some authority may be deemed to be vested in the partner so that the business can be properly and efficiently done. This authority of a partner to bind the firm conferred by this section is called ‘implied authority’. For an act to be covered in implied authority, it is necessary that (i) act, done is in relation to the partnership business, and (ii) act is done in usual way, in relation to the business of the kind carried on by the firm.

TRADING FIRM AND NON-TRADING FIRM – A firm would be a trading firm if the business consists in buying and selling of goods. There is an implied power to borrow in a trading firm. Whereas in businesses which are not commercial rather professional in nature, no partner can borrow or pledge the partnership property so as to bind the co-partners.

In the case of Mercantile Credit Company Ltd. V. Garrod, it was held that sale and purchase of second hand cars could be impliedly considered to be the business of the firm which deals with letting lock up garage repairing of cars.

In the case of Higgins v Beaucham, Miles, an active partner of cinema proprietors, borrowed money from Higgins. Higgins brought an action against the sleeping partner, Beaucham. It was held that business of the firm was not a trading one and hence there was no implied authority of borrowing. Therefore, the firm was not bound by the loan taken by one partner in this case.

This implied authority has certain statutory restrictions, mentioned in Section 19(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-

1. Submit a dispute relating to the business of the firm to arbitration;
2. Open a banking account on behalf of the firm in his own name;
3. Compromise any claim or portion of a claim by the firm;
4. Withdraw a suit or proceeding filed on firm’s behalf;
5. Admit any liability in a suit or proceeding against the firm;
6. Acquire immovable property on firm’s behalf;
7. Transfer immovable property belonging to the firm;
8. Enters into partnership on behalf of the firm.

Mode of exercising authority (Section 22) – In order to bind the firm, the act of a partner must be done in a manner stated in Section 22. According to this Section, 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 or other person on behalf of the firm has been done or executed – (i) in the name of the firm, or (ii) in a manner expressing or implying an intention to bind the firm.

Extension or restriction of implied authority by agreement (Section 20) – Section 20 of the Indian Partnership Act, 1932, enables the partners in a firm, by contract between the partners to extend or restrict the implied authority of a partner. When a restriction has been imposed on the implied authority of a partner, such a restriction is not binding the third party unless the third party has the knowledge of the restriction.

The restrictions stated in Sec. 19(2) are statutory restrictions because it is effective against all the third parties as they are deemed to be having the knowledge of the restrictions. Whereas, the third parties cannot be presumed to be having the knowledge of the restrictions which the partners may impose by a contract between themselves.

2. LIABILITY WHEN THE PARTNER ACTS IN EMERGENCY (SECTION 21)

Sometimes an act of the partner can bind the firm, even if he does not have either express or implied authority to act on behalf of the firm, if the same act has been done in a situation of emergency as described in Section 21. According to this section, a partner in emergency has the authority 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. For such an act, the firm would be bound towards the third party.

3. LIABILITY FOR ADMISSION MADE BY A PARTNER (SECTION 23)

According to Section 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 firm’s business.

4. LIABILITY ON NOTICE TO AN ACTING PARTNER (SECTION 24)

Section 24 provides that 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 a notice to the firm. EXCEPTION- In the case of a fraud on the firm committed by or with the consent of that partner. This excludes sleeping or dormant partner, the fraudulent acts of a partner and the fraudulent acts with the consent of partner.

5. LIABILITY FOR TORTS AND WRONGFUL ACTS (SECTION 26)

Section 26 states that where by the wrongful act or omission of a partner 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 guilty partner.

6. LIABILITY FOR MISAPPLICATION OF MONEY OR PROPERTY (SECTION 27)

In this section, two kinds of cases of misapplication of money or property have been mentioned-

• When the money or property has been received by a partner and he misapplies the same without accounting for it to the firm; and
• When the money or property has been received by the firm from the third party and the same is misapplied by any of the partners.

In either case the firm is liable to make good the loss to the third party.

Aishwarya Says:

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