Indian Partnership Act
Authority of Partners: Sections 18 to 24
An outsider dealing with a firm cannot read the partnership deed. The Act therefore fixes, by law, how far one partner can bind the others. Section 18 makes every partner an agent of the firm. Section 19 gives him implied authority to do what is usual in that trade, and lists eight acts he cannot do without express authority. Section 20 lets the partners restrict that authority, but only as against an outsider who knows of the restriction. Section 21 adds emergency powers, Section 22 the manner of acting, and Sections 23 and 24 deal with admissions and notice. This note works through the chain.
The four questions that decide whether an act binds the firm, with implied authority, the excluded list, emergency, admissions and notice
1. Partner as Agent: Section 18
i. The rule. Subject to the provisions of the Act, a partner is the agent of the firm for the purposes of the business of the firm.
ii. The limit. Only for the purposes of the business of the firm; a personal transaction binds only the partner.
iii. Read with the rest. Section 18 is expressly subject to the Act, so it must be read with Sections 19 to 22.
2. Implied Authority: Section 19(1)
§ The test The provision. Subject to the provisions of Section 22, 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; this authority is called his implied authority. Two questions. Is the act of the kind that this firm's business involves? And was it done in the usual way in that trade? Trade usage matters. What is usual for a trading firm may be unusual for a professional firm. Borrowing and pledging goods are ordinary for a trading firm; they are not assumed for a firm of solicitors. |
Act | Ordinarily within implied authority? |
|---|---|
Purchasing goods of the kind the firm deals in | Yes |
Selling the firm's goods in the usual course | Yes |
Receiving payments of debts due to the firm and giving receipts | Yes |
Engaging employees for the business | Yes |
Borrowing money for the firm | Yes for a trading firm, where the trade requires it; not assumed for a non-trading firm |
Pledging goods of the firm as security | Yes for a trading firm, in the usual course |
Drawing, accepting or endorsing negotiable instruments in the firm name | Yes for a trading firm, in the usual course of its business |
3. Acts Outside Implied Authority: Section 19(2)
§ The eight excluded acts, absent usage or custom of trade to the contrary • Submit a dispute relating to the business of the firm to arbitration. • Open a banking account on behalf of the firm in his own name. • Compromise or relinquish any claim or portion of a claim by the firm. • Withdraw a suit or proceeding filed on behalf of the firm. • Admit any liability in a suit or proceeding against the firm. • Acquire immovable property on behalf of the firm. • Transfer immovable property belonging to the firm. • Enter into partnership on behalf of the firm. • The reason. Each of these either disposes of the firm's rights or property, or commits it beyond its ordinary trade. Express authority, or the consent of all the partners, is needed. |
4. Extension and Restriction: Section 20
§ The rule and its protection for outsiders The partners may, by contract, extend or restrict the implied authority of any partner. Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person dealing with him knows of the restriction or does not know or believe that person to be a partner. Effect. A private limit in the deed is fully effective between the partners, but it does not affect an innocent outsider. Practical step. If a restriction is to be effective against a third party, tell him about it, or ensure he otherwise knows. |
5. Emergency: Section 21
i. The rule. A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm.
ii. The test is the prudent person acting in his own case, not a technical view of authority.
iii. Illustration. Selling perishable goods at a lower price when the market is collapsing, or hiring transport at high rates to move stock away from a fire.
6. Mode of Acting: Section 22
i. The rule. 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.
ii. Substance over form. The firm name need not be used if the intention to bind the firm is clear from the document and the circumstances.
iii. The converse. A partner who signs only in his own name, without any indication that he acts for the firm, may bind only himself.
7. Admissions and Notice: Sections 23 and 24
Provision | The rule | The limit |
|---|---|---|
s. 23: admissions | An admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business | It is evidence, not conclusive proof; a statement outside the ordinary course does not bind the firm |
s. 24: notice | Notice to a partner who habitually acts in the business of the firm, of any matter relating to the affairs of the firm, operates as notice to the firm | Except in the case of a fraud on the firm committed by or with the consent of that partner |
8. Frequently Asked Questions
What is the implied authority of a partner?
The authority to do acts to carry on, in the usual way, business of the kind carried on by the firm, under Section 19(1).
Which acts are outside a partner's implied authority?
The eight acts listed in Section 19(2), including arbitration, compromising claims, admitting liability, and acquiring or transferring the firm's immovable property.
Does a restriction in the partnership deed bind outsiders?
Only if the outsider knows of the restriction, or does not know or believe the person to be a partner: Section 20.
Is notice to one partner notice to the firm?
Yes, if given to a partner who habitually acts in the business and it relates to the firm's affairs, except where that partner is party to a fraud on the firm: Section 24.