A firm has no legal personality of its own, so its dealings with outsiders operate through the law of agency. S.18 makes every partner an agent of the firm, and S.19 fixes the scope of that agency by reference to the usual course of business. Liability under S.25 is joint and several, and S.28 extends it to persons who allow themselves to be held out as partners.
Legal Framework
| Provision | Subject | Key Rule |
|---|---|---|
| S.18 | Partner to be agent of the firm | Subject to the Act, a partner is the agent of the firm for the purposes of the business of the firm |
| S.19(1) | Implied authority | 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 |
| S.19(2) | Acts outside implied authority | In the absence of usage or custom of trade to the contrary, implied authority does not empower a partner to submit a dispute to arbitration, open a bank account in his own name on behalf of the firm, compromise a claim, withdraw a suit, admit liability in a suit, acquire immovable property, transfer immovable property, or enter into partnership on behalf of the firm |
| S.20 | Extension and restriction of implied authority | Partners may extend or restrict implied authority by contract, but a restriction does not affect a third party who deals without notice of it |
| S.22 | Mode of doing an act to bind the firm | The act must be done in the firm name, or in any manner expressing or implying an intention to bind the firm |
| S.25 | Liability of a partner for acts of the firm | 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 |
| S.26 | Liability of the firm for wrongful acts of a partner | The firm is liable where a partner acts in the ordinary course of business or with the authority of his partners |
| S.27 | Liability of the firm for misapplication by partners | The firm is liable where a partner receives money or property of a third party in the course of business and misapplies it |
| S.28 | Holding out | Anyone who represents himself, or knowingly allows himself to be represented, as a partner is liable to anyone who gives credit to the firm on that faith |
Partner as Agent (S.18, S.19)
Implied Authority
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 to bind is called the partner's implied authority.
| Ordinarily within implied authority | Ordinarily outside implied authority (S.19(2)) |
|---|---|
| Buying and selling goods in the line of business | Submitting a dispute to arbitration |
| Receiving payments and giving receipts | Opening a bank account in a partner's own name for the firm |
| Engaging employees for the business | Compromising or relinquishing a claim of the firm |
| Borrowing on the firm's behalf in a trading firm | Withdrawing a suit or admitting liability in a suit |
| Pledging or selling the firm's goods | Acquiring or transferring immovable property of the firm |
| Employing a lawyer to defend an action | Entering into partnership on behalf of the firm |
Why the excluded acts in S.19(2) are treated differently: Each of them either disposes of the firm's substantial assets, surrenders its legal rights, or changes the composition of the firm itself. These are matters going beyond the routine conduct of trade, on which every partner is entitled to be consulted. Requiring express authority protects partners from having their fundamental interests dealt with by a single colleague.
Facts: Two men were partners in a business of letting garages and repairing cars. The partnership agreement expressly excluded the buying and selling of cars. One partner sold a car he had no title to, and the buyer sued the other partner.
Issue: Was the sale within the partner's implied authority despite the express internal prohibition?
Held: The firm was liable. The test is what is usual in the kind of business the firm carries on as it appears to outsiders, not what the partners have privately agreed between themselves. Selling cars was an act of a kind usual in a motor trade business, and the buyer had no notice of the restriction.
Relevance: The leading illustration of S.19 read with S.20. Cite where partners rely on an internal restriction against a third party who did not know of it.
Restriction of Authority (S.20)
Partners may by contract extend or restrict the implied authority of any partner. However, a restriction does not affect a third party who deals with the firm without notice of it.
Why notice is the dividing line: The internal agreement governs the partners among themselves and gives an aggrieved partner a claim against the one who exceeded his authority. But an outsider cannot be expected to investigate the firm's private arrangements. Making the restriction effective only on notice keeps the risk of an undisclosed limitation on the partners who created it.
Mode of Binding the Firm (S.22)
To bind the firm, an act or instrument must be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm.
Liability of Partners
Liability for Contracts (S.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.
| Consequence | Explanation |
|---|---|
| Creditor's choice | A creditor may sue all the partners together or any one of them alone |
| No requirement to exhaust firm assets | The creditor need not first proceed against the firm's property |
| Unlimited liability | A partner's personal assets are available to firm creditors |
| Right of contribution | A partner who pays more than his share may claim contribution from the others |
Liability for Torts (S.26)
Where by the wrongful act or omission of a partner acting in the ordinary course of the business of the firm, or with the authority of his partners, loss or injury is caused to a third party, the firm is liable to the same extent as the partner.
Liability for Misapplication (S.27)
| Situation | Liability |
|---|---|
| A partner acting within his apparent authority receives money or property of a third party and misapplies it | The firm is liable |
| The firm in the course of its business receives money or property of a third party and it is misapplied by any partner | The firm is liable |
Why the firm answers for a partner's dishonesty: The third party was induced to entrust money to the firm by the apparent authority the partners collectively created. As between an innocent outsider and the partners who chose to associate with the wrongdoer, the loss is more fairly borne by the partners, who can select their colleagues and supervise them.
Holding Out (S.28)
Anyone 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 to anyone who has, on the faith of that representation, given credit to the firm.
| Requirement | Explanation |
|---|---|
| A representation of being a partner | By words, writing or conduct |
| Made by or knowingly permitted by the person charged | Mere passive ignorance is not enough |
| Credit given on the faith of the representation | The third party must have relied on it |
Nature of the liability: It is founded on estoppel, so the person held out is liable to the third party but does not thereby become a partner, and acquires no rights against the firm.
Retired partner: A retiring partner remains liable for acts done before retirement and, unless public notice is given under S.32(3), may continue to be liable to those who deal with the firm in ignorance of the retirement.
Illustrations
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Act within implied authority: A partner in a firm dealing in electrical goods buys stock on credit in the firm name. The firm is bound under S.19, this being an act done to carry on in the usual way business of the kind the firm carries on.
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Internal restriction ineffective against an outsider: Partners in a garage business agree internally not to trade in cars. One partner sells a car to a buyer who knows nothing of the restriction. Applying Mercantile Credit Co Ltd v Garrod (1962) and S.20, the firm is bound, since the act was usual in that kind of business and the buyer had no notice.
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Act outside implied authority: A partner in a trading firm, without consulting the others, sells the firm's godown premises. Under S.19(2) transferring immovable property is outside implied authority, so the firm is not bound in the absence of express authority or ratification.
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Joint and several liability: A firm of three partners owes a supplier Rs. 9 lakhs. The supplier may sue any one partner alone for the whole sum under S.25, without first proceeding against the firm's assets. That partner may then claim contribution from the others.
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Liability for tort: A partner, while delivering the firm's goods, negligently injures a pedestrian. Under S.26 the firm is liable, the act having been done in the ordinary course of the firm's business.
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Misapplication of client money: A partner in a firm of accountants receives client funds for onward payment of taxes and diverts them. Under S.27 the firm is liable to the client, notwithstanding that the other partners were innocent.
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Holding out: A retired partner allows his name to remain on the firm's letterhead and signboard. A supplier extends credit believing him still a partner. Under S.28 he is liable to that supplier, although he is no longer a partner and has no rights against the firm.
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No holding out without knowledge: A former partner's name is used on invoices without his knowledge after he has taken all reasonable steps to have it removed. He is not liable under S.28, since he did not knowingly permit the representation.
Recall Check
- What is the test for whether an act falls within a partner's implied authority?
- Why does an internal restriction on a partner's authority not bind a third party without notice?
- What must a third party prove to hold a person liable under S.28?
Key Cases
Mercantile Credit Co Ltd v Garrod (1962) Mercantile Credit v Garrod 1962
Issue: Whether a sale of a car bound the firm where the partnership agreement expressly excluded dealing in cars.
Rule: Implied authority is measured by what is usual in the kind of business the firm appears to outsiders to carry on, not by the partners' internal agreement.
Held: The firm was liable, the buyer having no notice of the restriction.
Cox v Hickman (1860) Cox v Hickman 1860
Issue: Whether persons receiving profits were partners and so liable to the firm's creditors.
Rule: Liability as a partner depends on whether the business is carried on by or on behalf of the person charged.
Held: The creditors were not partners and were not liable.
Distinctions
| Basis | Implied Authority (S.19) | Express Authority |
|---|---|---|
| Source | Operation of law from the partnership relation | Agreement of the partners |
| Scope | Acts usual in the kind of business carried on | Whatever the partners agree |
| Effect of internal restriction | Ineffective against a third party without notice (S.20) | Governs as between the partners |
| Excluded acts | Those listed in S.19(2) | May be conferred expressly |
| Basis | Liability under S.25 | Liability under S.28 |
|---|---|---|
| Basis | Being a partner in fact | Estoppel from a representation |
| Rights against the firm | Full rights as a partner | None |
| Extent | All acts of the firm while a partner | Only to those who gave credit on the faith of the representation |
| Character | Joint and several | Personal to the person held out |
| Basis | Firm's Liability for Contract (S.25) | Firm's Liability for Tort (S.26) |
|---|---|---|
| Trigger | Act of a partner within authority | Wrongful act or omission in the ordinary course of business |
| Extent | The full contractual obligation | To the same extent as the partner |
| Innocence of other partners | Irrelevant | Irrelevant |
Flashcards
What is the effect of S.18?
Subject to the provisions of the Act, a partner is the agent of the firm for the purposes of the business of the firm.
State the test of implied authority under S.19(1).
Whether the act was done to carry on, in the usual way, business of the kind carried on by the firm.
Name three acts outside a partner's implied authority.
Submitting a dispute to arbitration, compromising a claim of the firm, and acquiring or transferring immovable property of the firm (S.19(2)).
Does an internal restriction on a partner's authority bind third parties?
Not unless the third party has notice of it (S.20).
What is the nature of a partner's liability under S.25?
Joint with all the other partners and also several, for all acts of the firm done while he is a partner.
Is the firm liable where a partner misapplies money received from a client?
Yes, under S.27, where the money was received in the course of business or within the partner's apparent authority.
What is holding out?
Under S.28, where a person represents himself or knowingly permits himself to be represented as a partner, he is liable to anyone who gives credit to the firm on the faith of that representation.
Does a person held out under S.28 become a partner?
No. The liability rests on estoppel; he is liable to the third party but acquires no rights against the firm.
Exam Scenario
Problem: Meridian Motors is a firm of three partners, Rakesh, Sunita and Tarun, carrying on the business of vehicle servicing and spare parts retail. Their deed expressly forbids any partner from buying or selling vehicles. Rakesh nevertheless sells a used truck belonging to a customer to a dealer, Uday, who knows nothing of the deed and pays market value. Sunita, while driving the firm's recovery van on a service call, negligently injures a cyclist. Tarun retired six months ago but the firm's signboard and invoices still bear his name, which he has noticed and not objected to; on that basis a lubricant supplier has extended fresh credit of Rs. 3 lakhs. Advise the customer, the cyclist, and the supplier.
Step 1: Map each claimant to a provision before arguing
| Claimant | Provision | Who is liable |
|---|---|---|
| The customer whose truck was sold | S.19(1), S.20, S.25 | All three partners, jointly and severally |
| The injured cyclist | S.26, S.25 | The firm, and any partner |
| The lubricant supplier | S.28 | Tarun personally, by estoppel |
Step 2: The truck sale, measured by the trade and not by the deed
Apply S.19(1) with S.20. The question is not what the deed says but whether selling a vehicle is an act done to carry on in the usual way business of the kind Meridian appears to outsiders to carry on.
A firm servicing vehicles and retailing spare parts is in the motor trade, and dealing in vehicles is an act of a kind usual in that trade. Mercantile Credit Co Ltd v Garrod (1962) is directly on point: an express internal prohibition on buying and selling cars did not protect the partners against a buyer without notice.
Uday had no notice, so the firm is bound and all three partners are liable to the customer under S.25, jointly and severally.
Step 3: The cyclist's injury
Apply S.26. Sunita's negligence occurred while driving the firm's van on a service call, plainly in the ordinary course of the firm's business, so the firm is liable to the same extent as Sunita herself.
The cyclist may proceed against any partner under S.25.
Step 4: The supplier and Tarun's holding out
Apply S.28. Tarun has retired and so is not a partner in fact, but his name remains on the signboard and invoices, and he knowingly permitted the representation by noticing it and not objecting.
The supplier extended fresh credit on the faith of that representation, so Tarun is liable for the Rs. 3 lakhs by estoppel.
Had Tarun taken reasonable steps to have his name removed and it had been used without his knowledge, he would not be liable, since S.28 requires knowing permission.
The internal prohibition is no answer to an outsider. Rakesh's breach of the deed gives Sunita and Tarun a claim against him internally under S.13, but under S.20 it does not affect Uday, who dealt without notice of it.
Holding out does not make Tarun a partner. His liability under S.28 rests on estoppel. He answers to the supplier but acquires no rights against the firm.
Public notice is the retiring partner's only protection. A retiring partner should give public notice under S.32(3) to end exactly this exposure. Tarun gave none and left his name on display.
Conclusion. All three partners are liable to the customer for the truck and to the cyclist for her injury, the firm answering under S.19 and S.26 and the partners under S.25. Tarun is additionally liable to the supplier for Rs. 3 lakhs under S.28.
See Also
- Partnership: Definition, Nature and Test : mutual agency, of which the rules in S.18 and S.19 are the practical expression.
- Relations of Partners Inter Se : the internal rights of partners against a colleague who exceeds his authority.
- Reconstitution and Dissolution of Firm : the public notice a retiring partner must give to end his exposure.