In this article, we will discuss various topics under section 9 and section 20 to section 29 of the Indian Partnership Act, 1930. This post is a continuation of previous blogs on Partnership.
Few quick links to help you recapitulate the topic: Partnership.
Rights and Liabilities of a Minor in Partnership
Rights and Duties of Partners in Partnership
Partnership: Liability to third parties
Table of Contents
Act beyond implied authority (section 9):
if there is no usage or custom of trade to the contrary, the implied authority of the partners does not empower them to
- Submit a dispute relating to the business of the firm to arbitration as it is not the ordinary business of partnership to enter into submission for arbitration,
- Open a bank account on behalf of the firm in his own names,
- Compromise or relinquish any claim or portion of a claim by the firm against a third party (ie an outsider),
- Withdraw a suit or proceeding filed on behalf of the firm,
- Admit any liability in a suit or proceedings against a firm:
- Acquire immovable property on behalf of the firm; Transfer immovable property belonging to the firm, and
- Enter into a partnership on behalf on behalf of the firm,
Extension and Restriction of Partner’s implied authority: (Section 20):
However the implied authority of a partner may be extended or restricted by contract between the parties. The partner can undertake the above-mentioned matters where:
- He has the specific or express authority of a partner by agreement, or
- The usage or custom of trade permits him to do so Under the following conditions, the restrictions imposed on the implied authority of a partner by agreement shall be effective against a third party (1). The third party knows about the restrictions and (2). The third-party does not know that he is dealing with a partner in a firm
Rights in an Emergency (Section 21):
In an emergency a partner has the authority to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence acting under the similar circumstances s in his own case and such acts bind the firm.
Example:
A, a partner borrows from B Rs. 1,500 in the name of the firm but in excess of his authority, and utilizes the same in paying off debts of the firm. Here the fact that the firm has contracted debts suggests that it is a trading firm, and as such it is within the implied authority of A to borrow money for the business of the firm. This implied authority, as you have noticed, may be restricted by an agreement between him and other partners. Now if B, the lender is unaware of the restrictions imposed on A, the firm will be liable to repay the money to B. On the contrary, B’s awareness as to this restriction will absolve the firm of its liability to repay the amount to B. You should further note that the above-mentioned extension or restriction is only possible with the consent of all the partners. Anyone partner, or even a majority of the partners, cannot restrict or extend the implied authority.
Acts in Emergency (Section 21):
Over and above the implied authority which every partner wields subject to the provision of Section 20, the Act further recognizes that each partner can bind the firm by all of his acts done in an emergency, with a view to protecting the firm from any loss, provided he has acted in the same manner a man of ordinary prudence would have acted in the like circumstances.
Admission by partner – its effects (Section 23)
Partners, as agents of each other, can make binding admissions but only in relation to a partnership transaction and in the ordinary course of the business, an admission or representation by a partner will not, however, bind the firm if his authority on the point is limited and the other party knows of the restriction. The section speaks of admissions and representations being evidenced against the firm. That is to say, they will affect the firm when tendered by third parties; they may not have the same effect in case of disputes between the partners themselves.
Example:
X and Y are partners in firms dealing in spare parts of different brands of motorcycle bikes. Z purchases a spare part for his Yamaha motorcycle after being told by X the spare part is suitable for his motorcycle Y is ignorant about this transaction. The spare part proves to be unsuitable for the motorcycle and t is damaged X and Y are both responsible to Z for his loss.
Notice to an acting partner – its effect (Section 24):
The notice to a partner who habitually acts in the business of the firm, on matters relating to affairs of the firm, operates a notice to the firm except in the case of fraud on the firm committed by or with the consent of that partner.
Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm just as the notice to an agent is the notice to his principal. This notice must be actual and not constructive. It must be received by a working partner and not by a sleeping partner It must further relate to the firm’s business. Only then it would constitute notice to the firm.
Example: P, Q, and R are partners in s business for the purchase and sale of second-hand goods. R purchases a second-hand car on behalf of the firm form S. in the course of dealings with S, he comes to know that the car is a stolen one and it actually belongs to X, P, and Q is ignorant about it. All the partners are liable to the real owner.
The only exception would lie in the case of fraud, whether active or tacit. For example, A, a partner who actively participates in the management of the business of the firm bought for his firm, certain goods, while he knew of a particular defect in the goods.
His knowledge as regards the effect, ordinarily, would be constructed as the knowledge of the firm, though the other partners in fact were not aware of the defect. But because A had, in league with his seller conspired to conceal the defect form the other partners, this rule would be inoperative and the other partners would be entitled to reject the goods, upon detection by them of the defect.
Liabilities to third parties (Section 25 to section 27):
The partners are jointly and severally responsible to third parties for all acts which come under the scope of their express or implied authority. This is because all the acts done within the scope of authority are the acts done towards the business of the firm (section 25).
The question of liability of partners to third parties may be considered under different heads. These are as follows:
- Contractual liability: Every partner is liable jointly with other partners and severally for the acts of the firm while he is a partner. The expression ‘act of the firm’ denotes any acts or omission by all the partners or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm.
Again in order to bring a case under Section 25, it is necessary that the act of the firm, in respect of which liability is enforced against a party must have been done while he was a partner.
Thus, where certain persons were found to have been partners in a firm where the acts constituting an infringement of a trademark by the firm took place, it was held that they were liable for damages arising out of the alleged infringement, it is immaterial that the damages arose after the dissolution of the partnership. - Liability for tort or wrongful act: The firm is liable to the same extent as the partner for any losses or injury caused to a third party by the wrongful acts of a partner if they are done by the partners while acting
(a) in the ordinary course of the business of the firm and
(b) with the authority of the other partners.
If the act in question can be regarded as authorized and as falling within either of the categories mentioned in Section 26, the fact that the method employed by the partners in doing it was unauthorized or wrongful would not affect the question.
Furthermore, all the partners in a firm are liable to a third party for loss or injury caused to him by the negligent act of a partner acting in the ordinary course of the business.
For example, one of the two partners in a coal mine acted as manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced. As a result, thereof an injury was caused to a workman the other partners were held responsible for the same. - Liability for misappropriation by a partner: Section 27 provides that when a partner acting within his apparent authority, receives money or other property from a third person and misapplies it, or where a firm in the course of its business, received money or property from a third person and the same is misapplied by a partner while it is in the custody of the firm, is liable to make good the loss.
It may be observed that the workings of the two clauses of Section 27 are designed to bring out clearly an important point of distinction between the two categories of cases of misapplication of money by the partners.
The first clause covers the misapplication of money or property belonging to a third party made by the partner receiving the same. For this provision to be attracted, it is not necessary that the money should have actually come into the custody of the firm.
On the other hand, the provision in the second clause would be attracted when such money or property has come into the custody of the firm and it is misapplied by any of the partners.
The firm would be liable in both cases. If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm and the other partners will not be liable, unless the money received comes into their possession or under their control.
Example: A B and Care partners of a place for car parking, P stands his car in the parking place but A sold out the car to a stranger. For this liability, the firm is liable for the acts of A.
Right of Transferee of a partner’s share( Section 29):
A share in a partnership is transferable like any other property, but as the partnership relationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as the original partner. The Supreme Court has held that the assignee will enjoy only the right to receive the share of profits of the assignor and account of profits agreed to by other partners.
The Rights of a such a transferee are as follows:
- During the continuance of partnership, such transferee is not entitled:
(a) To interfere with the conduct of the business,
(b) To require accounts or
(c) To inspect the books of the firm. - On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled against the remaining partners:
(a) To receive the share of assets of the firm to which the transferring partner was entitled, and
(b) For the purpose of ascertaining the share, he is entitled to an account as from the date of dissolution.
By virtue of section 31, which we will discuss hereinafter, no person can be introduced as a partner in a firm without the consent of all the partners.
A partner cannot be transferring his own interest, make anybody else a partner in his stead, unless the other partners agree to accept that person as a partner.
At the same time, a partner is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded as an existing Interest and tangible property that can be assigned.
As a general rule, the partners are at liberty to determine their rights and obligations per se (as between themselves) by means of a contract between themselves.
It follows that an agreement between the partners which enable one either to introduce a new partner in the firm (over and above the existing partners) or to substitute another partner in his place by novation transfer or otherwise, could bind all the partners.
If a partner has an unconditional right to transfer his share so as to substitute another person in his stead, then he will not be liable for any acts of the firm subsequent to a valid transfer of his share and serving notice of it on its copartners.
This would be in effect, be tantamount to his retirement from the firm and his rights and liabilities would be governed by Section 32 of the Act.
The legal consequence of partner coming in and getting out (Section 31-38):
Any change in the relation of partners will result in the reconstitution of the partnership firm. Thus on the admission of a new partner or retirement of a partner or expulsion of the partner or on the insolvency of a partner, etc. a firm will be reconstituted.
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