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RELATIONS OF PARTNERS WITH THIRD PARTY

Table of Contents

(Ss. 18 to 30)

QUESTION BANK.

Q.1. “The law relating to partnership is founded on the principles of agency”- Elucidate.

Q.2. Discuss the nature and scope of the implied authority of a partner in his relation with third person.

Q.3. Explain the extent of partner’s liability for the acts of firm.

SHORT NOTES.

Partnership by holding out.
Minor as partner.

SYNOPSIS.

LIABILITY OF PARTNERS FOR ACTS OF FIRM: –
Doctrine of implied authority: –
Partners to be an agent of the firm (S. 18): –
Implied authority of partners (S. 19):-
Restrictions on implied authority of partner (S. 19&20):-
Partners authority in emergency (S. 21): –
Mode of doing an act which binds firm (S. 22): –
Effect of admission by partner (S. 23):-
Effect of notice to a partner (S. 24): –
LIABILITY OF FIRM FOR WRONGFUL ACTS OR TORTS OF PARTNER (S.26):-

III. LIABILITY OF THE FIRM FOR MISAPPROPRIATION OF PARTNERS (S. 27):-

THE LIABILITY OF NON-PARTNER FOR HOLDING OUT (PARTNER BY ESTOPPEL) (S. 28): –
Representation-
Knowledge of representation: –

Application of the doctrine to retirement cases –

MINOR AS A PARTNER (S. 30): –

a). Can minor be admitted as partner?

b). Rights of a minor partner: –

c). Liabilities of a minor partner: –

d). Effect of election by a minor (S. 30):-

I. LIABILITY OF PARTNERS FOR ACTS OF A FIRM: –

25 of the Act provides that every partner is liable, jointly with all the other partners and severally, for all acts of the firm while he is a partner.

The significance of such joint and several liabilities is that for every act of the firm, a partner can be sued individually and jointly.

Partners incur liability for acts of the firm done while they were partners. An act was done after a partner ceased to be so either by death or otherwise will not bind him.[1].

Held- The petitioner partner is entitled to recover it from another.

A. Doctrine of implied authority: –

Partners are liable for the ‘act of the firm’. But a firm is incapable of acting by itself; therefore, it is some act of the partner which is going to be regarded as the act of a firm. The question then is, what acts of partner are the acts of the firm? The answer is to be found in the provisions of Ss.18 and 19 of this Act.

1. Partners to be an agent of the firm[2] (S. 18): –

Every partner is an agent of the firm for the purpose of the firm’s business.

Every partner embraces the character of both a principal and an agent. However, a partner is an agent only for the purpose of the firm’s business.

2. Implied authority of the partner (S.19):-

S.19 Sub.S. (1) lays down that the act of a partner, which is done to carry on, in the usual way, the business of the kind carried on by the firm, binds the firm. Such authority of a partner to bind a firm is called his ‘implied authority’.

Thus, the act of a partner done by him as an agent in the usual course of a business is ‘an act of the firm’, which binds the firm. This is described as an implied authority of a partner.

Thus, the scope of ‘implied authority’ is linked with the nature of the business and the usual manner of carrying it on[3].

3. Restrictions on implied authority of the partner (S. 19 and 20)

The restrictions on partners’ implied authority are of two kinds: statutory restrictions, i.e. imposed by the Act, and those that the partners may impose in their agreement in the partnership deed.

Firstly, statutory restrictions are imposed by S. 19(2). This sub-section lists a number of things that the implied authority of a partner does not empower him to do without consulting the other partners. This Section provides that, in the absence of any usages or custom of trade to the contrary, the implied authority of a partner does not empower him to-

i) Submit a dispute relating to the firm’s business to an arbitrator.
ii) Open a banking account on behalf of the firm in his own name.

iii) Compromise or relinquish any claim or portion of a claim by the firm

iv) Withdraw a suit or proceeding filed on behalf of the firm.
v) Admit any liability in a suit or proceeding against the firm.
vi) Acquire immovable property on behalf of the firm.

vii) Transfer immovable property belonging to the firm.

viii) Enter into a partnership on behalf of the firm.

These restrictions are effective worldwide, whether or not a particular person contracting with the firm is aware of them.

The second kind of restriction is those that may be imposed by the partnership deed or any agreement between the partners S.20 (Express authority).

B. Partners authority in an emergency (S.21): –

21 authorises the partner, 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. Such an act binds the firm.

Usually, the implied authority of a partner empowers him to do only such acts as are usually done in carrying on the kind of business in which the firm is engaged. But this section empowers the partner in an emergency to do what is ‘unusual’ in order to save the firm from loss. Therefore, even though it does not fall under his implied authority, such an unusual act still binds the firm.

C. Mode of doing an act which binds firm (S.22): –

22 provides the procedure to be followed by the partner while acting on behalf of the firm to make the firm responsible for such an act.
22 provides that, in order to bind a firm, an act or instrument done or executed by a partner (or another person on behalf of the firm)- should be done or executed-

1) In the firm’s name, or

2) In any other manner expressing or implying an intention to bind the firm.

D. Effect of admission by partner[4] (S. 23):-

S.23 provides that an admission or representation made by a partner concerning the affairs of the firm is evidence against the firm. It is made in the ordinary course of a business.

An ‘admission’ is a statement by which a person acknowledges the existence of a fact against his own interest. If a partner makes a statement in the ordinary course of the firm’s business by which he admits a fact or liability, that is an admission against a firm and binding on the firm.

E. Effect of a notice on a partner[5] (S. 24): –

Notice to a partner who faithfully acts in the business of a firm, of any matter relating to the affairs of the firm, operates as a notice to the firm except in the cases of fraud on the firm committed by or with the consent of that partner.

In- Williamson V. Barbor[6]

Held: – The notice to the person before he becomes a partner of a firm would not operate as notice to the firm.

II. LIABILITY OF A FIRM FOR WRONGFUL ACTS OR TORTS OF A PARTNER[7] (S.26).

26 provides that ‘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 its partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.

In Hamlyn V. John Houston & Co[8].

Facts: – The Plaintiff and defendant were two-grain merchants. The defendant firm consisted of one ‘H’ and the other ‘S’. The business was carried by ‘H’. ‘H’ bribed the clerk of the plaintiff and induced him to give secret information about the plaintiff’s customers and prices. Consequently, the plaintiff lost business to the tune of Pound 750. He sued the defendant’s firm.

Held: – The firm was held liable.

III. LIABILITY OF THE FIRM FOR MISAPPROPRIATION OF PARTNERS[9]

(S. 27):-

In the course of a business of a firm, money or property belonging to a third party is likely to be received by the firm or its partners. If the partner misappropriates the same, the question arises as to whether the firm is liable. S. 27 provides the answer; it lays down two rules – where 1) A partner acting within his apparent (implied) authority receives money or property from a third party and misapplies it, or. 2) If A firm, in the course of its business, receives money or property from a third party and is misapplied by any of the partners,-the firm is liable to make good the loss. The liability of the firm arises when the money or property is received by a partner within his ‘apparent authority’ or by the firm ‘in the course of a business’. These two things are nothing but the same because partners ‘apparent authority’ also depends upon the ordinary course of the firm’s business.

In Plurner V. Gregory[10].

Facts: J and W were working as solicitors in ‘partnership.’ The plaintiff gave £ 1300 for investment in a specified security. Afterwards, without J’s knowledge, the plaintiff gave W another sum of £ 1700 on his representation that it would be invested in some other security. J died, and both sums were misappropriated by W.

Held: – J’s estate was held liable for the sum of £ 1300 but not for Pound 1700 because it was not part of the firm’s business to receive money for investment generally.

IV. THE LIABILITY OF NON-PARTNER FOR HOLDING OUT[11] (PARTNER BY ESTOPPEL) (S. 28): –

Sometimes, a person who is not a partner, in fact, is held liable as if he were a partner. S. 28 provides for the liability of the non-partner for holding out. It lays that anyone who, by words (spoken or written) or by conduct, represents, himself, or knowingly permits himself to be represented as a partner in a firm is liable as a partner in that firm to anyone 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 giving credit S.28 (1).

However, when, after the partner’s death, the business is continued in the old firm name, the continuous use of that name (or of the deceased partner’s name) does not, of itself, make his legal representative or his estate liable for any act of the firm done after his death S.28(2).

In other words, where a person represents himself or knowingly permits himself to be represented as a partner in a firm, he becomes liable as a partner in that firm to anyone who, on the faith of any such representation, has given credit to the firm. The person so representing himself, or permitting himself to be so represented, is known as a partner by holding out or a partner by estoppel. Many a time, when a partner retires from the firm without giving public notice, he is held to be a partner by holding out.

Essentials of partner by holding out:-

1. Representation-

The person who sought to be charged with the liability for holding out must have represented himself to be a partner in the firm. Representation may be made either by words, written or spoken or by conduct. An express representation takes place when a person allows his name to be used in the affairs of the firm, e.g. in the name title or signboard of the firm.

Mr Bevan V. The National Bank Ltd[12].

Facts: -One ‘M.W.’, was the manager of B’s business. The business was carried on under the name ‘ M.W. & Co’.

The Court held: – That by permitting his name to be used in the title of the firm, he had made a representation that he was a partner and, therefore, he was liable to those who gave credit to the firm on the faith of that representation.

2. Knowledge of representation: –

The person seeking to hold another liable by holding out or estoppel must show that he had believed the representation and acted on it.

Application of the doctrine to retirement cases –

The doctrine of holding out is applied mainly when a partner retires and public notice of retirement is not given. The basic purpose of this doctrine is to bring a retired person into the purview of liability. The retired partner remains responsible to the firm’s customers who have given credit to the firm without knowledge of the retirement.

V. MINOR AS A PARTNER (S. 30): –

a). Can a minor be admitted as a partner?

30 of the Act deals with the rights, liabilities and disabilities of a minor in a partnership.

As a general rule, S. 30 lays down that a minor can not be a partner in a firm. However, the exception is that with the consent of all the partners, he may be admitted to the benefits of a partnership (S. 30(1).

The relation of partnership arises out of contract. A minor is incompetent to contract by virtue of S. 11 of the Indian Contract Act. Therefore, generally, a contract of partnership can not be entered into with a minor.

30 only concession is that a minor may be admitted as a member for the firm’s benefit. This can only be done with the consent of all the partners.[13].

b) Rights of a minor partner: –

The following rights of a minor can be deduced from S.30. Minor is admitted for the benefit of a firm, therefore-

1). He has a right to share the firm’s property and profits, S. 30(2).

2). He may have access to and inspect and copy the accounts of the firm S. 30 (2).

3). He may sue the partners for accounts or payment of his share of the firm’s property or profits after severing his connections with the firm but not before (S. 30 (4).

4). He has the right to election[14] within six months of his becoming major, either to continue as a full-fledged partner or leave the firm (S.30 (5).

5). On severing connection with the firm after becoming major, his share is not liable for any act of the firm done after the date of the public notice that he has elected not to become a partner (S.30 (8).

6). He is not personally liable for any act of the firm during his minority. He is not liable beyond his share in a partnership firm.

c) Liabilities of a minor partner: –

1). The minor’s share is liable for the firm’s acts, but the minor is not personally liable for any act beyond his share ( S.30 (3).

2). If, on attaining majority, he elects to become a partner, he becomes personally liable to a third party for all acts of the firm done since he(minor) was so admitted for the benefits of the partnership (S. 30 (7) (a).

3). After attaining a majority and before giving public notice (of his election either to continue as a partner or not), he may be liable for holding himself out as a partner.

d). Effect of election by a minor (S. 30):-

30 provides that, at any time within six months of attaining majority by a minor or of his obtaining knowledge that he had been admitted to the benefits of a partnership (whichever date is later), such person may give public notice that he has elected to become or that he has elected not to become a (full-fledge) partner in the firm, and such notice shall determine his position as regards the firm.

1). Where such a person elects to remain partner or fails to give such notice, his rights and liabilities will be similar to those of a full-fledged partner. He will be personally liable for all acts of the firm since he was first admitted to the firm’s benefits. His share in property and profits remains the same as it was before unless altered by agreement (S. 30 (7).

2) If he elects not to remain a partner ( S. 30 (8).

a). His rights and liabilities shall continue to be those of a minor up to the date of a public notice,

b). His share shall not be liable for any acts of the firm done after the date of the notice.

c). He shall be entitled to sue the partners for his share of the property and profits.

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[1] In K. A. Louiz v. A. A. Augustin (AIR 2005 Ker. 1)

Facts– One partner paid entire amount decreed against the firm. He subsequently sued another partner for recovery of half amount against.

[2] भागिदार हा भागिदारी संस्थेचा दलाल असतो. [ पार्टनर पार्टनरशिप फर्म का ब्रोकर होता है।]

[3]. In Ragharaveera and Sons V. Padmavati (AIR 1978 Mad. 81)

Held that the firm of engineering contractors, solicitors are non-trading partnership and members of such firm have no implied authority to borrow money on credit of the firm, for partnership purpose.

[4] भागिदाराच्या कबुलीचा परिणाम. [साथी के कबूलनामे का असर।]

[5] एखादया भागिदारास दिलेल्या सुचनेचा परिणाम. [एक साथी को दिए गए निर्देशों का प्रभाव।]

[6] 1877.

[7] भागिदाराच्या अपकृत्याबद्दल भागिदारी संस्थेची जबाबदारी. [पार्टनर के अपकृत्य के लिए पार्टनरशिप फर्म का दायित्व।]

[8] 1902.

[9] भागिदाराच्या अफरा-तफरीसंबधी भागिदारी संस्थेची जबाबदारी. [पार्टनर के अफरा-तफरी के संबंध में पार्टनरशिप इंस्टीट्यूशन का दायित्व।]

[10] 1974

[11] भागिदारी नसलेला परंतु तसा दर्षविणा-या व्यक्तीची जबाबदारी. [उस व्यक्ति का दायित्व जो भागीदार नहीं है लेकिन इस प्रकार कार्य नहीं करता है।]

[12] 1906

[13] In Shivram V. Gaurishankar AIR 1961 Bom. 136

Held: – That there can not be partnership consisting of all minor or one adult and all other minors.

[14] भागिदार म्हणून राहणे अथवा न राहणे यातील निवड करण्याचा अधिकार. [ भागीदार के रूप में बने रहने या न रहने का चयन करने का अधिकार।]