Relation of Partners to Third parties - Explanation and FAQs
According to Section 18 of the Indian Partnership Act (1932), a partner is an agent in the business for the purpose of growth of the firm. He is given the right to act on behalf of the firm and take necessary actions when required. He is granted permission to make moves, conduct business as usual with certain limitations being put in some situations.
When an individual enters into a partnership, he binds a relation not only with the co-partners but also with the third-party individuals or entities. Relation of partners to third parties is subject to various rules and regulations.
A partner shares the profit in a business. Similarly, he also holds a number of liabilities. One of them is being an agent to all the others who co-own a business.
Partner as an Agent of the Firm
Section 18 of the Indian Partnership Act specifies the role of a partner as an agent. Since a partner is an agent of the firm, he also holds some responsibilities towards the parties involved in the business. A partner thus needs to play the role of a principal as well as the agent of a business firm.
When a partner acts in his interest in the common goal of a firm, he is playing the role of a principal. On the other hand, when he is acting as per the interest of the co-partners, he is an agent.
Relation of partners to third parties requires them to play an agent in the firm. However, a partner is never solely responsible for the transactions and dealing between the company and the third parties.
Implied Authority of a Partner
When a partner takes some action or makes a decision in accordance with the usual course of the business, he binds that firm. This authority is better known as an implied authority in partnership. But this authority ceases to exist if there is a contrary agreement present. The details of this provision are given under Section 19(2) of the Indian Partnership Act (1932).
The doctrine of implied authority in partnership as specified in the Act restricts a partner from taking certain actions. They are as follows:
Submit a business-related dispute to arbitration.
Open a bank account in his name on behalf of that business firm.
Compromise or dissolve any part of a claim by that firm.
Withdraw a case filed on behalf of that firm.
Admit any sort of liability in a suit or proceeding against that firm.
Buy an immovable property on behalf of that firm.
Make any partnership on behalf of that firm.
Transfer any immovable property which belongs to that partnership firm.
Section 22 of the Partnership Act also mentions that any act was done by a partner with an intention to bind the firm must be done in the name of that firm. A partner’s role as an implied agency in partnership depends on the nature, extent, and intent of a business firm.
As per Section 20 of the Partnership Act, partners in a business undertaking can make a contract to extend or dissolve the implied authority of any partner. This would affect the relation of partners to third parties only when that party is aware of the restrictions.
An express authority of the partner means the authority that is given by spoken words or written.
Extension and Restriction of Partners Implied Authority
The extension and restriction of the authority of a partner depends on the clauses of the existing contract between the respective parties in the firm. However, a partner is allowed to perform actions on his own authority if he has an express authority of a partner which is either by an agreement or if the customs of the trade permit him to.
Partner’s Authority in an Emergency
Section 21 of the Indian Partnership Act (1932) states that in case of any emergency, every partner has the authority of taking necessary actions to prevent the firm from bearing losses. It might include making payments or incurring liabilities. Any such act has to meet the following requirements:
It was a situation of absolute emergency.
The particular partner acted according to the need of the situation.
The intention behind that partner's action was only to protect the business from loss.
That act was reasonable and just under those circumstances.
In an emergency act, relations of a partner to third parties and his dealings with them is also under scrutiny. If the action has been taken without prior notice or permission, it will be considered only if ratified by other partners.
Admissions Made by a Partner
In the Indian Partnership Act, Section 23 talks about the admission or representation made by an existing partner. If it concerns the affairs of that firm and has been made in the normal course of business, it can be taken as evidence against the firm. This is because a partner is an agent of the firm as well as works for its business goals.
Liability of a Partner for acts of the Firm
The liability of all partners of a firm together is mentioned under section 25 of the Indian Partnership act. It states the fact that every partner of the firm can be held liable jointly or individually for all the acts done by the firm while he or she is a partner of the firm.
Partners can also be held liable individually or jointly depending on the act and the decision made by the third party. This means that even if a partner had no role to play while deciding the act on behalf of the firm, he or she can be held liable to the third party in case such an act causes damage to them.
Rules to be followed when a Partner misuses or misapplies Money or Property
Section 27 recognizes the liability of the firm for a particular kind of wrong act done by a partner. The provisions are stated below.
When a partner misapplies money or property received within the apparent authority.
A firm in its course of business receives money or property that is misapplied or misused by any of its partners while it is in the custody of the firm, the firm is liable to make good of the loss suffered.
Solved Examples of the Relation of Partners to Third Parties
1. Alex is a partner in a firm of solicitors. He chose to borrow Rs. 50,000 from Vinay and executed a promissory note in the name of the firm without any authority. Are other partners liable on the note?
Ans: No. A solicitor is not allowed to draw, accept and endorse any sort of negotiable instrument, under the normal circumstances and operations of a business. Hence, According to Sections 19 and 22, Alex is solely liable for the note.
This act is considered to be done in the normal way of conducting business, in case of a banking firm.
2. Alex is a partner of a firm. He borrowed Rs. 50,000 from Vinay in excess of his authority. Alex spends this money to pay off his debts. Is the firm liable to repay the money to Vinay?
Ans: It is a trading firm because it has debts. Hence, borrowing money for the business of the firm is within the authority of Alex. An implied authority can be restricted with the help of an agreement between the partners.
Since Alex borrows the money in excess of his authority, it is assumed that his implied authority has been restricted by such an agreement.
This brings us to the question of whether Vinay is aware of this restriction imposed on Alex by the firm. If Vinay is aware of the restriction, then the firm is not liable to repay him. However, if he is unaware of the restrictions, then the liability of repayment lies with the firm.
FAQs on Relation of Partners to Third Parties in Partnership
1. What is the basic principle that governs the relationship between partners and third parties in a partnership?
The fundamental principle, as outlined in Section 18 of the Indian Partnership Act, 1932, is that a partner acts as an agent of the firm. This means any act performed by a partner in the usual course of the firm's business binds the entire firm and all other partners in their dealings with external parties.
2. What is meant by the 'implied authority' of a partner when dealing with third parties?
Implied authority is the authority a partner has to bind the firm for acts done to carry on the business in its usual way. This authority is not explicitly stated in an agreement but is understood to exist for the firm's normal operations. For example, a partner in a retail business has the implied authority to purchase goods on credit for the store.
3. What are some examples of actions a partner cannot take under their implied authority?
According to Section 19(2) of the Indian Partnership Act, 1932, a partner's implied authority does not permit them to perform certain actions unless there is a specific agreement or trade custom allowing it. Key restrictions include:
- Submitting a business dispute to arbitration.
- Opening a bank account for the firm in their own personal name.
- Compromising or giving up a legal claim made by the firm.
- Withdrawing a lawsuit filed on behalf of the firm.
- Buying or selling immovable property on behalf of the firm.
4. Why is a partner considered both an agent and a principal of the firm?
A partner holds a dual role. They are an agent because their actions within the scope of business can bind the other partners and the firm. Simultaneously, they are a principal because they are personally bound by the actions of all other partners. This concept of mutual agency is a foundational characteristic of a partnership.
5. How does a partner's authority in an emergency situation differ from their normal authority?
In an emergency, a partner's authority expands significantly. As per Section 21 of the Act, a partner can take any necessary action to protect the firm from suffering a loss. This emergency authority is valid only if the partner acts as a person of ordinary prudence would under similar circumstances to protect their own interests, and the action is solely for the firm's benefit.
6. What is the significance of 'joint and several liability' for a third party who is owed money by a partnership?
The principle of 'joint and several liability' (Section 25) offers strong protection to third parties. It means that every partner is liable for the firm's debts both collectively (jointly) and individually (severally). This allows a creditor to sue all partners together or any single partner to recover the full amount of the debt, making it easier to enforce their claim.
7. Can a firm be held responsible if a partner misuses money received from a third party?
Yes, the firm is liable to repay the loss to the third party in two specific scenarios under Section 27. First, if a partner misuses money or property received from a third party while acting within their apparent authority. Second, if the firm receives money or property in its normal business, and it is misused by any partner while in the custody of the firm.
8. What happens if a third party deals with a partner, unaware that the partner's authority was privately restricted by the other partners?
If partners have an internal agreement to restrict a partner's authority, that restriction is not binding on a third party who is unaware of it. If the third party interacts with the partner in good faith, the firm remains liable for the partner's actions. The firm's only option for recovery is to take action against the partner who violated the internal agreement.
