Chapter: 1.3 Relations of Partners to Third Parties of the Indian Partnership Act

Relations of Partners to Third Parties

Section 18 - Partner to be agent of the firm:

As per Section 18 subject to the provisions of this Act; a partner is the agent of the firm for the purposes of the business of the firm.

Partner as agent:

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 other's contract in carrying on the trade, as much as single principal would be by the act of the agent, who was to give the whole of the profits to this employer. In other words, partner transacts business for himself as principal, and also as an agent for the other partners even though the other partner is a sleeping partner. One of the tests of partnership is whether there was a binding contract of mutual agency between the partners.

Section 19 - Implied authority of partners as agent of the firm
For this purpose Section 19 is reproduced as follows:

(1) Subject to the provision 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
(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 names
(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,
(h) Enter into partnership on behalf of the firm.

Implied authority

Every partner is in contemplation of law the general and accredited agent of the partnership and may consequently bind all the other partners by his acts in all matters, which are within the scope and objects of the partnership. The implication of sub-section (1) is that most intelligent and prudent partner may be liable for the acts of an imprudent or a reckless partner provided they are done in usual course of business. His want of knowledge or disapproval of such acts serves 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 rectified and approved by all the partners.

Section 25 - Liability of a partner for acts of the firm.

As per 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.

Act of the firm

Act of the firm is defined in Section 2 (a) of the Partnership Act.

Done while he is a partner

The rule laid down in this section flows from the rule laid down in Section 18. The condition that the act 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.

Joint and several liabilities

This section is very important from the point of view of a creditor who has dealt with a firm. A creditor can sue the partners jointly as well as separately and successively. A creditor has therefore several actions in respect of the same debt.

Section 26 - Liability of the firm for wrongful acts of a partner.

As per Section 26 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 extent as a partner.

Section 27 - Liability of firm for misapplication by partners.

As per Section 27 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 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-sections (a) and (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 or property so received is misapplied by any of its members. In both cases the firm is liable to make good the loss. The other distinction is that clause (a) contemplates that an act may not be within the ordinary course of the firm's business but it may have been within the scope of his ostensible authority. Clause (b) refers to an act within the implied authority of a partner.

Section 28 - Holding out

For this purpose Section 28 of Partnership Act is reproduced as follows:
(1) Any one 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 the partner's death the business is continued in the old firm name, the continued use of that name or of the deceased partner's 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

This section is based on the well-known principle of estoppels. The principle of estoppels introduced in this section imposes liability on two distinct classes of persons viz. (i) a person who is not a partner; and (ii) a person who may be 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.