Indian Partnership Act
Mutual Agency: The True Test of Partnership
Five words in Section 4 carry most of the weight of this Act: carried on by all or any of them acting for all. They mean that each partner acts as an agent of the others and is bound as a principal by what they do. That is why a partner's contract binds the firm, why liability is unlimited, and why the courts call mutual agency the true test of partnership. This note explains where the idea appears in the Act, how far a partner's authority extends, and why profit sharing alone never decides the question.
Mutual agency between partners, where it comes from, implied authority and its limits, and what follows from it
1. The Idea
§ Agent and principal at the same time Section 4: the business must be carried on by all or any of them acting for all. Section 18: subject to the provisions of the Act, a partner is the agent of the firm for the purposes of the business of the firm. Two roles. When A contracts for the firm, he is an agent of B and C; when B contracts, A is a principal bound by it. That reciprocity is what 'mutual' means. Section 22: to bind the firm, an act must be done in the firm name, or in any manner expressing or implying an intention to bind the firm. |
2. Implied Authority: Section 19
Aspect | The position |
|---|---|
The general rule, s. 19(1) | 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 implied authority |
Examples within it | Buying and selling goods in which the firm deals, receiving payments and giving receipts, engaging employees, and borrowing where the trade ordinarily requires it |
Acts excluded, s. 19(2) | In the absence of usage or custom of trade to the contrary, a partner's implied authority does NOT empower him to submit a dispute to arbitration; open a bank account in his own name on behalf of the firm; compromise or relinquish a claim of the firm; withdraw a suit or proceeding; admit liability in a suit; acquire immovable property on behalf of the firm; transfer immovable property of the firm; or enter into partnership on behalf of the firm |
Variation, s. 20 | Partners may by contract extend or restrict the implied authority of a partner; a restriction binds a third party only if he KNOWS of it or does not know that the person is a partner |
3. What Flows from Mutual Agency
§ The consequences • Liability, s. 25. Every partner is liable jointly and severally for all acts of the firm done while he is a partner. • Wrongful acts, s. 26. The firm answers for loss or injury caused by a partner acting in the ordinary course of the business or with the authority of his partners. • Misapplication, s. 27. The firm makes good money or property received from a third party and misapplied. • Holding out, s. 28. Even a person who is not a partner may be liable if he is held out as one, because outsiders act on appearances. • Notice, s. 24. Notice to a partner who habitually acts in the business operates as notice to the firm, except in a fraud on the firm committed by or with the consent of that partner. |
4. Why It Is the True Test
📖 Cox v Hickman, (1860) 8 HL Cas 268 The House of Lords rejected profit sharing as the decisive test and held that the real question is whether the trade is carried on by persons acting on behalf of one another. Creditors who managed a business and took its profits under a deed of arrangement were not partners, because the business was carried on for the benefit of the creditors, not on their behalf as principals. |
📖 K. D. Kamath & Co. v Commissioner of Income Tax, (1971) 2 SCC 873 The Supreme Court held that the essential conditions are an agreement to share profits and the business being carried on by all or any acting for all. Control and management may be vested in one partner alone, and the powers of others may be restricted, without destroying the partnership, provided the agency relationship exists. |
- The contrast. Profit sharing is present in a loan, in employment and in the sale of goodwill. Only in a partnership do the parties act for one another.
5. Agency in Ordinary Law and in a Firm
Basis | Ordinary agency | Partnership |
|---|---|---|
Roles | One is principal, the other agent | Each partner is both, at the same time |
Source of authority | The principal's authority, express or implied | The Act plus the partnership contract: ss. 18 to 20 |
Liability | The principal is liable; the agent ordinarily is not | Every partner is personally liable, jointly and severally |
Termination | The principal may revoke | Authority ends on retirement, and as against outsiders only after public notice: s. 32 |
6. Frequently Asked Questions
What is mutual agency in partnership?
That each partner acts as an agent of the others and is bound as a principal by their acts done in the ordinary course of the firm's business.
Why is mutual agency the true test of partnership?
Because profit sharing can exist in a loan or employment; only partners carry on the business acting for one another, as Cox v Hickman held.
Can a partner's authority be restricted?
Yes, under Section 20, but a restriction binds a third party only if he knows of it.
Which acts are outside a partner's implied authority?
Those listed in Section 19(2), including arbitration, compromising claims, admitting liability in a suit, and acquiring or transferring immovable property of the firm.