Relation of Partners to Third Parties under the Partnership Act

Section 18: Partner as an Agent of the Firm

A partner is considered the agent of the firm for conducting the business of the firm. This means that all partners are bound by the actions of any one partner, just as a principal is bound by the actions of their agent. This mutual agency among partners is essential for creating a partnership. Because each partner has the capacity to act as an agent for the firm, any act performed by one partner can render the entire firm liable to third parties. The law of partnership is, therefore, often seen as an extension of the law of principal and agent.

The relationship between partners and third parties is based on the principle of mutual agency. As stated by Mr. Justice Story, "Every partner is an agent of the partnership, and his rights, powers, duties, and obligations are governed by the same rules and principles as those of an agent." Similarly, Lord Wensleydale observed that if two or more individuals agree to carry on a trade and share the profits, each acts as a principal and an agent for the others, and each is bound by the other's contracts in the course of the trade.

A partner's agency is limited to the business of the firm. They can enter into contracts, purchase and sell goods, borrow money, and perform similar acts necessary for the firm's business. However, if a partner engages in activities unrelated to the firm's business, such as purchasing materials for personal use or borrowing money for personal reasons, the firm is not bound by those actions.

Sections 18 to 30: Relations of Partners to Third Parties

These sections of the Indian Partnership Act detail the relationship between partners and third parties, covering the following areas:

I. Nature and Extent of Liability of the Firm for a Partner's Acts (Sections 18-27)

The liability of a firm for a partner's acts is explained under the following headings:

A. Nature of Liability of the Partners Towards Third Parties (Section 25)

Section 25: Liability of a Partner for Acts of the Firm

Every partner is jointly and severally liable for all acts of the firm done while they are a partner. This means that each partner can be held personally responsible for the firm's obligations, and a third party can choose to sue any one partner individually or multiple partners jointly.

For example, in M/s Glorious Plastics Ltd v Laghate Enterprises, it was held that if a partner retires on April 1, 1982, and an act of the firm is done on March 1, 1985, Section 25 does not apply to make the retired partner liable for actions taken after their retirement. The liability of the partners is joint and several, even if the act was performed by just one of them.

Liability of Partners for Acts Within Their Authority

1) Acts Within the Authority of a Partner (Sections 18, 19, 20, and 22)

A partner acts as an agent of the firm, and his actions bind the firm if they are within his authority. This authority can be either express or implied.

Mode of Exercising Authority (Section 22)

According to Section 22, for an act to bind the firm, it must be done in the firm’s name or in a manner that clearly expresses or implies an intention to bind the firm. This ensures that any act falling within a partner’s implied authority binds the firm if executed appropriately.

2) Partner’s Authority in an Emergency (Section 21)

Even if a partner lacks express or implied authority, his actions can still bind the firm if performed in an emergency to protect the firm from loss. Section 21 states that a partner has the authority to act prudently in an emergency, similar to how a reasonable person would act to protect their interests.

3) Ratification of a Partner’s Act

If a partner acts without prior authority, the firm can still be bound by that act if it subsequently ratifies it. Ratification means the firm approves the act after it is done, making it as binding as if it had been done with prior authority.

4) Admissions Made by a Partner (Section 23)

According to Section 23, any admission or representation made by a partner regarding the firm’s business is evidence against the firm if made in the ordinary course of business. For example, if a partner admits to a contract or financial condition, this admission is binding on all partners. However, such admissions are not conclusive and can be disproved with evidence.

5) Effect of Notice to an Acting Partner (Section 24)

Section 24 states that any notice given to a partner who regularly acts on behalf of the firm is considered notice to the entire firm, except in cases of fraud committed by or with the consent of the partner.

6) Liability for Torts and Wrongful Acts (Section 26)

A firm is vicariously liable for wrongful acts committed by a partner within the ordinary course of business or with the authority of other partners. Section 26 holds the firm liable for any loss, injury, or penalty resulting from such acts, similar to a principal’s liability for the actions of their agent. For example, in the case of Hurruck Chand v. Gobind Lal, a partner who knowingly dealt with stolen goods made the firm liable for the tort of conversion, even though the other partner was unaware of the wrongdoing.

7) Liability for Misapplication of Money or Property by a Partner (Section 27)

Section 27 recognizes the firm’s liability when a partner misapplies money or property received from a third party. If a partner, acting within his apparent authority, receives money or property and then misapplies it, the firm is liable to make good the loss.

Doctrine of Holding Out (Section 28)

Generally, a person who is not a partner in a firm cannot be held liable for the firm’s actions. However, under the doctrine of holding out, if a person represents himself as a partner, or allows others to represent him as such, he can be held liable to third parties as if he were a partner, based on the principle of estoppel.

Rights of Transferee of Partner’s Interest (Section 29)

The relationship between partners is built on mutual trust and confidence. As such, no partner can introduce a new partner or transfer his share in a way that substitutes an outsider in his place without the consent of all existing partners. If a partner does transfer his entire interest in the firm to a third party, the other partners can seek the dissolution of the firm.

Section 29 outlines the rights of a transferee of a partner’s interest:

Position of a Minor Admitted to the Benefits of Partnership (Section 30)

A partnership is based on a contract, and therefore, all partners must be competent to contract. Since minors are incompetent to contract, they cannot be full partners in a partnership firm. If a minor is mistakenly made a full partner, the partnership agreement would be invalid. However, a minor may be admitted to the benefits of the partnership, where they can receive a share of the profits but cannot be held liable for the firm’s losses.