Relationship of Partners to Third Parties
The relationship of partners to third parties under the Indian Partnership Act, 1932, is governed by principles of agency, joint and several liabilities, and good faith.
The Indian Partnership Act, 1932 (hereinafter referred to as “The Act”), governs the conduct, rights, duties, and obligations of partners in a partnership firm. An essential aspect of partnership law is the relationship between partners and third parties. This relationship has significant legal implications as it determines the extent of liability and authority vested in partners when dealing with outsiders.
Authority of Partners in a Partnership
Section 18 of the Act explicitly states that a partner acts as an agent of the firm for the business of the firm. This principle of agency binds the firm to acts done by a partner in the course of the firm's business.
Types of Authority
Express Authority: Authority is given to a partner through the partnership agreement or mutual consent.
Implied Authority: Authority a partner possesses by being a partner to carry on the usual business of the firm (Section 19).
Acts Within Implied Authority
The implied authority of a partner includes:
Purchasing or acquiring goods necessary for the business.
Hiring employees for the firm.
Settling accounts with third parties.
Acts Beyond Implied Authority
The same section limits implied authority, excluding acts such as:
Submitting a dispute to arbitration.
Acquiring immovable property.
Compromising or relinquishing a claim of the firm.
For acts beyond implied authority, express consent from the other partners is required.
Liability of Partners
Liability in a partnership context is a crucial aspect, especially concerning third parties. Partners are generally jointly and severally liable for the acts of the firm under Sections 25, 26, and 27 of the Act.
Joint and Several Liability
Section 25 makes all partners jointly and severally liable for debts and obligations incurred during the business of the firm. A third party can recover the entire debt from any one or more partners.
Liability for Acts of a Partner
Section 26 states that the firm is liable for wrongful acts or omissions of a partner if such acts are done:
In the ordinary course of the business of the firm.
With the authority of the other partners.
Liability for Misapplication of Money
Section 27 provides that if a partner receives money or property from a third party in the course of business and misapplies it, the firm is liable for such misapplication.
Admission and Representations by Partners
Section 23 binds the firm to admissions made by a partner concerning the business. Any statement or representation made by a partner during the business of the firm also binds the firm, provided it falls within the partner’s authority.
Notice to the Firm
Section 24 stipulates that any notice given to a partner concerning the affairs of the firm is deemed to be notice to the firm unless fraud is intended.
Liability of an Incoming Partner
An incoming partner is not liable for acts of the firm done before their admission unless otherwise agreed. However, they become liable for obligations arising after they join the firm (Section 31).
Liability of an Outgoing Partner
An outgoing partner continues to be liable for obligations incurred before their retirement. They can avoid further liability by providing public notice of their retirement (Section 32).
Holding Out (Doctrine of Holding Out)
Section 28 establishes the principle of holding out, which means a person representing themselves as a partner, or knowingly allowing others to do so, can be held liable as if they were a partner, even if they are not.
Dissolution and Its Impact on Third Parties
The dissolution of a partnership firm impacts third-party relationships significantly. Sections 45 and 46 provide for the liabilities of partners post-dissolution:
Public Notice: To avoid liability, a firm must give public notice of dissolution.
Winding Up: During winding up, third-party debts must be settled before any distribution of surplus among partners.
Case Laws on Partner’s Relationship with Third Parties
In Motilal v. Unnao Commercial Bank, (1930) a partnership deed restricted the authority of the partners to borrow money. Despite this, one partner borrowed money and accepted a bill of exchange without the third party being aware of the restriction. The court held that since the third party was unaware of the limitation, the firm was liable to the third party.
Conversely, in Prembhai v. Brown, (1873) the restriction on the implied authority of the partners was known to the third party. In this case, one partner of a carrier firm was authorised to draw bills only up to ₹200 each. Despite this, the partner issued two promissory notes of ₹1,000 each to a third party who was aware of the restriction. The court held that the firm was not bound by the notes since the third party knew the limitation on the partner’s authority.
Conclusion
The relationship of partners to third parties is pivotal to the operation of partnership firms under the Indian Partnership Act, 1932. The principles of agency, joint and several liability, and the doctrine of holding out ensure that third parties can rely on the actions of partners. Simultaneously, provisions limiting implied authority and mandating public notices protect partners from excessive liabilities. Thus, the Act strikes a balance between the interests of partners and third parties, fostering transparency and accountability in partnership transactions.
References
[1] Indian Partnership Act, 1932
[2] Dr. Avtar Singh, Introduction to Law of Partnership, Edition: 11th, 2018
[3] Relationship of Partners to Third Parties under Partnership Act, Available Here
[4] Motilal v. Unnao Commercial Bank, (1930) 32 Bom. LR 1571
[5] Prembhai v. Brown, (1873) 10 Bom HC Rep. 319