Indian Partnership Act
Implied Authority of a Partner: Sections 19 and 20
A partner's authority is not written in his hand; it is inferred from the business he is in. Section 19(1) says that an act done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. So the same act may bind a trading firm and not bind a firm of professionals, because the usual way differs. Section 19(2) then lists eight acts that no partner may do without express authority, and Section 20 lets the partners narrow or widen the authority, but only as against an outsider who knows. This note works through all of it.
Acts within implied authority for a trading and a non-trading firm, the eight excluded acts, and restriction under Section 20
1. The Test in Section 19(1)
§ Two questions 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. The authority to bind the firm conferred by this section is called his implied authority. Question one: is the act of that kind? Does the firm's business involve acts of this sort at all? A partner in a firm of chartered accountants does not buy and sell cloth. Question two: was it done in the usual way? Even an act of the right kind may be outside authority if done in an unusual manner, on unusual terms, or in a way no one in that trade would adopt. |
2. Trade Usage and the Kind of Firm
Act | Trading firm | Non-trading or professional firm |
|---|---|---|
Purchase goods of the kind the firm deals in | Within implied authority | Within authority, if the business involves such purchases |
Sell the firm's goods in the usual course | Within implied authority | Same |
Receive payments of debts due to the firm and give receipts | Within implied authority | Within implied authority |
Employ servants for the business | Within implied authority | Within implied authority |
Borrow money on the credit of the firm | Within implied authority, where the trade requires it | NOT presumed |
Pledge or mortgage the firm's goods as security | Within implied authority, in the usual course | NOT presumed |
Draw, accept or endorse negotiable instruments in the firm name | Within implied authority for a trading firm | NOT presumed |
Engage a lawyer to defend a suit against the firm | Within implied authority | Within implied authority |
- Why the difference. Borrowing and pledging are ordinary incidents of buying and selling; they are not ordinary incidents of practising a profession or running premises. English decisions such as Higgins v Beauchamp [1914] 3 KB 1192 drew this line, and Indian courts have followed the same approach under Section 19(1).
- Usage of trade. Section 19(2) itself opens with the words 'in the absence of any usage or custom of trade to the contrary', so a proved trade usage can widen what is usual.
3. The Eight Excluded Acts: Section 19(2)
Clause | The act | Why it is excluded |
|---|---|---|
(a) | Submit a dispute relating to the business of the firm to arbitration | It replaces the firm's right to a court trial |
(b) | Open a banking account on behalf of the firm in his own name | It puts the firm's money beyond the firm's control |
(c) | Compromise or relinquish any claim or portion of a claim by the firm | It gives away the firm's rights |
(d) | Withdraw a suit or proceeding filed on behalf of the firm | It abandons a claim already before a court |
(e) | Admit any liability in a suit or proceeding against the firm | It concedes the case for everyone |
(f) | Acquire immovable property on behalf of the firm | It locks up the firm's funds in an unusual asset |
(g) | Transfer immovable property belonging to the firm | It parts with a capital asset |
(h) | Enter into partnership on behalf of the firm | It would bring strangers into the relationship, against Section 31 |
- The remedy. Any of these acts may be done with express authority, or with the consent of all the partners, or may be ratified afterwards.
4. Extension and Restriction: Section 20
§ The provision The partners in a firm may, by contract between the partners, 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 partner to be a partner. Between the partners, the restriction is fully effective: a partner who breaches it is answerable to his co-partners. Against outsiders, it works only through knowledge. So a bank that has been told of a limit on a partner's borrowing power cannot rely on the usual authority. |
§ Common restrictions, and how to make them bite • Typical clauses. No borrowing above a stated sum; cheques above a limit to be signed jointly; no purchase of capital assets without the consent of all. • Communicate them. Write to banks, regular suppliers and customers; record the limits in the firm's dealings. • Extensions too. The deed may give one partner authority to do an act in Section 19(2), such as selling the firm's property, which he would otherwise lack. |
5. Applying the Rules
Facts | Result |
|---|---|
A partner in a cloth firm buys cloth on credit in the firm name | Binds the firm: usual for that business |
A partner in a firm of architects borrows money from a bank in the firm name | Not presumed: borrowing is not usual for a non-trading firm, unless shown otherwise |
A partner settles the firm's claim against a debtor for half the amount, without authority | Does not bind: Section 19(2)(c) |
A partner sells a shop belonging to the firm | Does not bind: Section 19(2)(g) |
A partner buys goods for the firm although the deed forbids purchases above one lakh rupees, and the seller knew of the limit | Does not bind: Section 20 |
The same purchase, where the seller had no notice of the limit | Binds the firm; the partner answers to his co-partners |
6. Frequently Asked Questions
What is the test of implied authority?
Whether the act was done to carry on, in the usual way, business of the kind carried on by the firm, under Section 19(1).
Can a partner borrow money for the firm?
In a trading firm, where the trade requires borrowing, yes. For a non-trading or professional firm it is not presumed, and express authority should be shown.
Can a partner sell the firm's immovable property?
Not under implied authority: Section 19(2)(g) requires express authority.
Does a restriction in the deed protect the firm against outsiders?
Only against an outsider who knows of the restriction, or who does not know or believe the person to be a partner: Section 20.