Indian Partnership Act
Liability of Partners and the Firm: Sections 25 to 27
Three sections decide who pays when something goes wrong. Section 25 makes every partner liable jointly and severally for all acts of the firm done while he is a partner. Section 26 makes the firm answerable for a partner's wrongful acts in the ordinary course of business. Section 27 makes it answerable for misapplication of money or property received from a third party. Together they give an outsider a simple position: deal with one partner, recover from any of them. This note covers all three, and the difference between contractual and tortious liability.
Sections 25, 26 and 27 as three routes to the firm's pocket, the ordinary course test, who pays in the end, and contract against tort
1. Section 25: Acts of the Firm
§ The central rule 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. 'Act of a firm', Section 2(a): 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. Joint: all may be sued together. Several: any one may be sued alone for the whole. The creditor chooses. Unlimited: after the firm's property is exhausted, a partner's separate property answers, in the order set by Section 49. |
Period | Liability of the partner |
|---|---|
Before he joined | None, unless he agrees to assume it: Section 31 |
While a partner | Full, for all acts of the firm: Section 25 |
After retirement | For acts before retirement; and for later acts until public notice is given: Section 32 |
After death | The estate is not liable for acts done after death: Section 35 |
After insolvency | Not liable for acts done after the date of adjudication: Section 34 |
2. Section 26: Wrongful Acts
§ Vicarious liability of the firm The rule. Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of the firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable to the same extent as the partner. Two routes. Ordinary course, or express authority of the partners. Either is enough. Torts covered. Negligence, fraud, conversion, defamation and other wrongs, where they occur in the running of the firm's business. |
📖 Hamlyn v Houston & Co., [1903] 1 KB 81 A partner, to obtain information about a competitor's contracts, bribed the competitor's clerk. The firm was held liable, because obtaining information about competitors was within the ordinary scope of the partner's authority, even though the means he used were wrongful. A firm cannot keep the benefit of a partner's business methods and disclaim their consequences. |
3. Section 27: Misapplication
Limb | When it applies | Illustration |
|---|---|---|
Clause (a) | Where a partner, acting within his apparent authority, receives money or property from a third party and misapplies it | A client pays money to one partner of a firm of solicitors for a specific purpose, and he uses it himself |
Clause (b) | Where a firm, in the course of its business, receives money or property from a third party, and it is misapplied by any of the partners while it is in the custody of the firm | Money received at the firm's office and entered in its books is later misappropriated by a partner |
- The distinction. Clause (a) turns on the partner's apparent authority when he received the money; clause (b) turns on the firm's receipt and later misapplication by any partner.
- The reason. The third party trusted the firm, not the individual; the loss should fall on those who chose to be in business together.
4. What 'Ordinary Course' Covers
§ Drawing the line • Covered: a partner's negligent driving while on the firm's work; a misrepresentation made to obtain business for the firm; negligence in a professional partner's handling of a client's matter; a wrongful act done with the partners' authority. • Not covered: a purely personal quarrel or assault unconnected with the business; a wrong committed in a line of business the firm does not carry on; an act that no one in that trade would regard as part of the business. • The test is the firm's business, not whether the partners approved the wrong. They rarely do. |
5. Who Bears the Loss in the End
i. The outsider recovers from the firm, or from any partner, in full.
ii. Application of property, Section 49: the firm's property is applied first to the firm's debts; a partner's separate property first to his separate debts.
iii. Recovery from the wrongdoer: the firm recovers from the guilty partner under Section 10 for fraud, which cannot be excluded, and under Section 13(f) for wilful neglect.
iv. Contribution between partners follows their profit-sharing proportions, subject to the deed.
6. Contractual and Tortious Liability Compared
Basis | Contractual liability | Tortious liability |
|---|---|---|
How it arises | A contract made by a partner within actual or implied authority, or ratified | A wrong done in the ordinary course of business or with the partners' authority |
Governing sections | 18 to 22, read with 25 | 26 and 27, read with 25 |
Key question | Was the act within authority, and did the outsider know of any restriction? | Was the wrong done in the ordinary course of the firm's business? |
Extent | The firm must perform or pay damages | The firm is liable to the same extent as the partner |
Nature | Joint and several | Joint and several |
Firm's recourse | Contribution among partners | Sections 10 and 13(f) against the guilty partner |
7. Frequently Asked Questions
What does joint and several liability mean under Section 25?
A creditor may sue all the partners together, or any one of them alone for the whole amount, and may reach that partner's personal property.
Is a firm liable for a partner's tort?
Yes, where the wrongful act was done in the ordinary course of the firm's business or with the authority of the partners: Section 26.
What is the difference between the two limbs of Section 27?
Clause (a) covers money received by a partner acting within apparent authority and misapplied by him; clause (b) covers money received by the firm and misapplied by any partner while in the firm's custody.
Can the firm recover from the partner at fault?
Yes, under Section 10 for fraud, which cannot be excluded by contract, and under Section 13(f) for wilful neglect.