Indian Partnership Act
Implied Authority: Trading and Non-Trading Firms
The single most tested point on a partner's authority is this: can one partner borrow money and bind the firm? The answer depends on the kind of firm. In a trading firm, one that buys and sells goods, borrowing is a normal incident of the business, so it falls within a partner's implied authority. In a non-trading firm, a firm of solicitors, doctors, accountants or cinema proprietors, it does not, unless expressly authorised. This note gathers the distinction, the leading cases, and the way Section 19(1) frames it in India.
The power to borrow in trading and non-trading firms, the cases that drew the line, and the Indian position under Section 19(1)
1. The Test: Section 19(1)
§ The usual course of THIS firm's business The rule. 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. 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? Consequence. The same act, such as borrowing, may bind one firm and not another, because what is usual differs from trade to trade. |
2. Trading and Non-Trading Firms
Act | Trading firm | Non-trading or professional firm |
|---|---|---|
Borrow money on the credit of the firm | Within implied authority, where the trade requires it | Not presumed; needs express authority |
Pledge or mortgage the firm's goods | Within implied authority, in the usual course | Not presumed |
Draw, accept or endorse bills of exchange and promissory notes | Within implied authority | Not presumed |
Buy and sell goods the firm deals in | Within implied authority | Within authority if the business involves it |
Receive payments and give receipts | Within implied authority | Within implied authority |
Engage employees for the business | 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.
3. What Counts as a Trading Firm
§ The distinction • A trading firm is one whose business consists in buying and selling goods: merchants, traders, manufacturers who sell, and the like. • A non-trading firm carries on a business that does not consist in buying and selling: solicitors, chartered accountants, doctors, architects, and cinema proprietors. • The test is the nature of the business, not its size or profitability. • Consequence for borrowing. A trading firm's partner has implied authority to borrow; a non-trading firm's partner does not, unless the deed or a course of dealing gives it. |
4. The Leading Cases
📖 Higgins v Beauchamp, [1914] 3 KB 1192 A firm of cinema proprietors was held to be a non-trading firm. One partner borrowed money and the lender sought to hold the firm liable. The court held that, since the firm did not buy and sell goods, borrowing was not within a partner's implied authority, and the firm was not bound. |
📖 Bank of Australasia v Breillat, (1847) 6 Moo PC 152 The Privy Council recognised that in a trading partnership one partner may borrow money on the credit of the firm and bind it, borrowing being incidental to the business of trade. |
📖 Niemann v Niemann, (1889) 43 Ch D 198 The court emphasised that the character of the firm's business determines the scope of a partner's implied authority; an act usual in one trade may be wholly outside the authority of a partner in another. |
5. The Indian Position and the Third Party
i. Section 19(1) frames the test as the usual course of business of the kind carried on by the firm, which is the statutory form of the trading and non-trading distinction.
ii. Usage of trade. Section 19(2) opens 'in the absence of any usage or custom of trade to the contrary', so a proved usage can widen a partner's implied authority.
iii. For a lender. A person lending to a non-trading firm should verify that the partner has express authority, or that all the partners have joined in the borrowing; he cannot safely rely on the usual authority of a partner.
iv. Restriction. Even in a trading firm, a restriction on borrowing binds an outsider who knows of it: Section 20.
6. Frequently Asked Questions
Can a partner in a trading firm borrow money and bind the firm?
Yes. In a trading firm, borrowing is within a partner's implied authority, because it is a normal incident of buying and selling.
Can a partner in a firm of solicitors borrow and bind the firm?
Not by implied authority. A firm of solicitors is a non-trading firm, so borrowing needs express authority, as Higgins v Beauchamp shows.
What decides whether a firm is trading or non-trading?
Whether its business consists in buying and selling goods; the nature of the business, not its size, is the test.
How does Section 19(1) express this distinction?
By binding the firm only by an act done to carry on, in the usual way, business of the kind carried on by that firm, so the same act may bind one firm and not another.