Partnership: Liability to third parties

In this article, we will discuss the liability of a partners to third parties.

In our previous articles, we have already discussed the basics of partnership, minor’s position in partnership, and the rights and duties of partners.

Table of Contents

What are the related provisions?

This part is covered in CHAPTER IV under section 25 to 27 of the Indian Partnership Act, 1930.

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).

Section 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.
The Indian Partnership Act, 1932

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 of the Indian Partnership Act, 1930, 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.

Section 26. Liability of the firm for wrongful acts of a partner-Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner.
The Indian Partnership Act, 1932

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. Liability of firm for misapplication by partners.
Where– (a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or
(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.
The Indian Partnership Act, 1932

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 C are 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.