CHAPTER 3
RELATIONS OF PARTNERS TO THIRD PARTIES
The relation between partners on the one hand and the third parties on the other is founded on the principle contained in Section 18, which reads as under:
18. PARTNER TO BE AGENT OF THE FIRM. —
Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm.
Law of partnership is generally stated as a branch of the law of principal and agent. Mutual agency between the partners is one of the essentials to create partnership.
For the purposes of the business of the firm, a partner is an agent of the firm. It means that a firm, i.e., all the partners of the firm are bound by the act of a partner as any principal would be bound by the act of his agent.
According to Mr. Justice Story: Story on Partnership Every partner is an agent of the partnership, and his rights, powers, duties and obligations, are in many respects governed by the same rules and principles as those of an agent; a partner virtually embraces the character of both a principal and agent.
A partner is an agent of the firm. This agency is only for the purposes of the business of the firm. He can enter into contracts, purchase and sell goods, borrow money and do similar acts in so far as they are necessary for the carrying on of the business of the firm and the firm will be bound by every such act.
If he, on the other hand, does an act unconnected with the business of the firm, e.g., purchases materials for the construction of his own building or borrows money for his daughter's marriage the firm will not be bound by that as he is not firm's agent for that purpose.
Chapter IV (Section 18 to 30) of the Indian Partnership Act contains provisions concerning the 'Relations of partners to third parties'. These provisions have been classified and discussed under the following subheads:
I. Nature and extent of liability of the Firm for the acts of a partner. Sections 18-27;
II. Doctrine of Holding Out, creating the liability of a 'Non-partner', Section 28;
III. Rights of transferee of a partner's interest Section 29; and
IV. Position of a 'Minor' admitted to the benefits of partnership Section 30.
I. NATURE AND EXTENT OF LIABILITY OF THE FIRM FOR THE ACTS OF A PARTNER (Sections 18-27)
The question of liability of the firm for the acts of a partner is being discussed under the following sub-heads:
A. Nature of liability of the partners towards third parties, and
B. The kind of acts for which the partners are liable which are as follows:
1. Liability for the acts done within the authority of a partner Sections 18, 19, 20 and 22. Such authority may be either express or implied authority.
2. Liability when a partner acts in emergency (Section 21);
3. Liability on ratification of a partner's act;
4. Liability for admission made by a partner (Section 23);
5. Liability on notice to an acting partner (Section 24);
6. Liability for torts and wrongful acts (Section 26); and
7. Liability for misapplication of money or property (Section 27).
Generally speaking, all partners of a firm are equally responsible for any act performed by any of them. They are to sink and swim together.
(A) THE NATURE OF LIABILITY OF THE PARTNERS TOWARDS THIRD PARTIES [SECTION 25]
Section 25 contains the following provision to explain the nature of liability of the partners of a firm:
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.
A principal is liable for the act of his agent done by him on his behalf.
According to Section 18, a partner is an agent of the firm for the purpose of the business of the firm. Obviously, therefore, the whole of the firm, which means all the partners of the firm, become liable for an act of the firm done by any partner.
As regards the nature of liability of the partners, Section 25 states that every partner is jointly and severally liable for all acts of the firm done while he is a partner.
If a partner retires on 1.4.1982 and the act of the firm is done on 1.3.1985, Section 25 cannot be applied to make such retiring partner liable for an act done after he has retired.
JOINT AND SEVERAL LIABILITY
The liability of all the partners is joint and several even though the act of the firm may have been done by one of them.
Thus a third party, if he so likes, can bring an action against any one of them severally or against any two or more of them jointly.
No individual partner can plead that action should be brought against others also. If any partner has to pay for more than his share of liability, he can subsequently claim contribution from his fellow partners.
LIABILITY FOR ACTS OF THE FIRM
Such liability is there for all acts of the firm.
According to Section 2(a), an act of a firm means any act 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.
It, therefore, means that any act or omission which creates a right enforceable is an act of the firm.
It may be a contract or a wrongful act, for example, fraud, negligence, mis-application of money or any tort.
All the partners are liable as much for the wrongful act of any partner as they would be liable for a contract entered into by one of them on behalf of the firm.
In India, the liability of the partners for contracts as well as for torts is joint and several.
In England, the partners are liable jointly in respect of contracts but they are liable jointly and severally in respect of torts.
LIABILITY FOR ACTS WHILE A PERSON IS A PARTNER
The liability of the firm or all the partners of the firm is created while it is carrying on the business of the firm. Hari Kishan v. State of M.P., A.I.R. 1996 M.P. 37.
The basis of the liability of the partners being mutual agency as between them, the liability of the partner, therefore, arises for such acts which are done while a person is a partner.
A partner, therefore, cannot be made liable for an act of the firm which may have been done before he was introduced to partnership.
Similarly, there can be no liability for the acts of the firm done after a person has ceased to be a partner.
This rule, of course, is subject to the provisions mentioned in Sections 32(3) and 45, according to which inspite of the retirement of a partner or the dissolution of a firm, the liability of the partners may continue as before until a public notice of retirement or dissolution of the firm is given.
An erstwhile partner is liable to pay the tax arrears due from the partnership firm pertaining to the period while he was a partner.
The liability of a partner, once arisen, does not come to an end merely because he ceases to be a partner. Third I.T.O., Salem v. Arunagiri Chettiar, A.I.R. 1996 S.C. 2160.
The liability as mentioned in this section is of all the partners whether they are active or dormant.
If a contract entered into by a partner with the third party is ratified by the firm, and the contract contains a clause for referring the dispute to arbitration, the firm becomes bound by that also.
In Sanganer Dal and Flour Mill v. F.C.I., one of the partners signed a tender on behalf of the firm, none of the partners denied the validity of the contract, nor did they raise any objection that the said partner was not authorized to enter into the contract, it was held that they were bound by a clause in the agreement which stated that the dispute was to be referred to the arbitration, and the reference by the Court to arbitration under Section 20 of the Arbitration Act was valid.
LIABILITY IS UNLIMITED
The liability of all the partners is not only joint and several but is also unlimited. It is the discretion of the third party to bring an action against some or all the partners.
No partner can be allowed to take the plea that between the partners themselves, the agreement provides only limited liability for him or responsibility for only a part of the share of the loss.
The third party may, therefore, bring ah action against anyone of the partners for the whole amount of his claim.
As between the partners themselves, the partner paying for more than his share of the responsibility may claim contribution from the others.
