Relations of Partners to Third Parties | Law of Contracts - CLAT PG PDF Download

Relation of Partners with Third Parties [Section 18]

• The relationship between partners and third parties is determined by the mutual agency among partners.
• According to Section 18 of the Indian Partnership Act, every partner acts as an agent of the firm for its business purposes.
• This means that each partner has the authority to bind the other partners through actions taken in the firm's name.
• As a result, all partners are collectively liable to third parties for the actions of any individual partner.

 Implied Authority of a Partner [Section 19] 

 Definition of Authority: 

• Authority refers to a partner's capacity to bind the firm through their actions.
• This authority can be either express or implied.

 Express Authority: 

• Express authority is the power given to a partner through mutual agreement among the partners.

 Implied Authority: 

• Implied authority, as outlined in Section 19 of the Indian Partnership Act, refers to the authority that is automatically granted to a partner based on the nature of the business and the usual practices involved.
• Implied authority encompasses actions that meet three key criteria:
•  Relevance to Normal Business:  The act must pertain to the regular business activities of the firm.
•  Usual Practice:  The act should be performed in the customary manner of conducting the firm's business. What is considered usual varies based on the type of business and industry standards. For instance, taking out a loan is usual for a trading business but unusual for a legal practice.
•  Firm's Intent:  The act must be carried out in the firm's name or in a way that clearly indicates an intention to bind the firm.

 Legal Precedent: 

• In the case of Mathuranath v. Bageshxvari Rani, a partner in a firm engaged in trapping elephants hired out an elephant without the consent of the other partners.
• The court ruled that this action fell within the implied authority of the partner.

 Examples of Implied Authority 

•  Borrowing Money:  A partner borrows money in the firm's name.
•  Ordering Goods:  A partner orders wine on the firm's letterhead.
•  Receiving Payments:  A partner receives money from a borrower and uses it for personal expenses without informing other partners.
•  Borrowing on Personal Credit:  A partner borrows money on personal credit but uses it for the firm's purposes.

 Acts within Implied Authority 

Implied authority allows a partner to perform various acts necessary for the firm's business, including:

•  Purchasing Goods:  Buying goods typically used in the business.
•  Selling Goods:  Selling products owned by the firm.
•  Settling Accounts:  Resolving financial matters with individuals or entities the firm deals with.
•  Receiving Payments:  Collecting debts owed to the firm and issuing receipts.
•  Hiring Employees:  Recruiting staff for the firm's operations.
•  Engaging Legal Counsel:  Hiring a lawyer to represent the firm in legal matters.
•  Borrowing Money:  Securing loans for the firm's business activities.
•  Pledging Goods:  Using firm goods as collateral for loans.
•  Negotiable Instruments:  Creating and managing bills of exchange and other negotiable instruments in the firm's name.

Restrictions on Implied Authority of a Partner

Restrictions on the implied authority of a partner can be categorized into two types:

1.  Statutory Restrictions 
2.  Restrictions Imposed by Mutual Agreement 

 I. Statutory Restrictions 

According to Section 19(2), the implied authority of a partner does not allow them to perform certain acts unless there is a contrary usage or custom of trade. These acts include:

• Submitting a dispute to arbitration related to the firm's business.
• Opening a bank account in the partner's own name on behalf of the firm.
• Compromising or relinquishing any claim or part of a claim by the firm.
• Withdrawing a lawsuit or legal proceedings filed on behalf of the firm.
• Admitting any liability in a lawsuit or legal proceedings against the firm.
• Acquiring immovable property on behalf of the firm.
• Transferring immovable property belonging to the firm.
• Entering into a partnership on behalf of the firm.

Liability of the Firm for Restricted Acts of a Partner 

• The firm is not liable to third parties for the restricted acts of a partner, regardless of whether the third party is aware of these restrictions.

 Restrictions Imposed by Mutual Agreement 

• Partners in a firm can, by mutual agreement, extend or restrict the scope of implied authority of any partner.
• However, a third party is not bound by such restrictions unless they are aware of them.
• The firm is only liable to the third party if the third party is unaware of the restrictions.

 Example: 

• If partners A, B, and C agree that no partner can buy goods worth more than Rs 2,00,000 without consulting the others, and a third party unaware of this restriction sells goods worth Rs 3,00,000 to partner A without consulting the others, the firm is liable to pay the full amount to the third party.

Implied Authority and Third Parties

 Liability of Partners to Third Parties 

• All partners are liable to third parties for acts of a partner that fall within the scope of implied authority.

 Effect of Restriction on Implied Authority 

• Partners can extend or restrict a partner's implied authority by mutual agreement.
• A third party is not bound by any restriction on a partner's implied authority unless they are aware of it.

 Effect of Admissions by a Partner 

• An admission or representation by a partner is evidence against the firm if it relates to the firm's affairs and is made in the ordinary course of business.

 Effect of Notice to an Acting Partner 

• Notice to a partner is considered notice to the firm if it relates to the firm's affairs, is given to a working partner, and there is no fraud committed by the partners and the third party against the firm.

 Contractual Liability 

• Every partner is jointly and severally liable for acts of the firm done while they were a partner.

 Liability for Torts and Wrongful Acts of a Partner 

• The firm is liable for loss or injury caused by a partner's wrongful act or omission if it was done in the ordinary course of business or with the authority of other partners.

 Liability for Misappropriation by a Partner 

• The firm is liable for misappropriation of money or property by a partner acting within their authority, whether the money came into the firm's custody or not.
• If a partner receives money outside their authority, the firm and other partners are not liable unless the money comes into their possession.

 Partner's Authority in Emergency 

• A partner can act in an emergency to protect the firm from loss, similar to an agent's authority in similar circumstances.
• These acts, while not part of implied authority, bind the firm.