Indian Partnership Act
Partnership and the Law of Agency
Agency is the engine of partnership. Section 18 makes every partner an agent of the firm, and the reciprocity of it makes every partner a principal bound by the others. That is mutual agency, and it is what separates a partner from an ordinary agent, an employee or a contractor. This note maps a partner's authority (actual, implied, apparent and emergency), the effect of restrictions, the firm's liability for a partner's act, and the way the agency ends on dissolution. It closes by distinguishing a partner from the persons he is most often confused with.
Mutual agency running both ways, compared feature by feature with ordinary agency, and partner against employee, agent and contractor
1. Every Partner an Agent, and a Principal
§ The dual character 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. Agent when he acts. His act, within authority, binds the firm and every other partner. Principal when the others act. He is bound by their acts, and is liable jointly and severally under Section 25. Mutual agency. Each partner is agent and principal at the same time; this reciprocity is the true test of partnership and the source of unlimited liability. |
2. Mutual Agency and Ordinary Agency
Feature | Mutual agency in a firm | Ordinary agency |
|---|---|---|
Source of authority | The Act, Sections 18 to 20, and the deed | The principal's grant, express or implied |
Roles | Agent and principal at the same time | One is principal, the other agent |
Who is bound | All the partners, jointly and severally | The principal alone |
Personal liability | The acting partner is also personally liable | An agent is ordinarily not personally liable |
Share in profits | A partner shares profits | An agent is paid a fee or commission |
Control | Mutual: each may take part, Section 12 | The principal controls the agent |
Termination | On retirement, and against outsiders only after public notice | The principal may revoke the agency |
Good faith | Utmost good faith between partners, Section 9 | A duty of loyalty from agent to principal |
3. The Scope of a Partner's Authority
Kind of authority | What it covers | Source |
|---|---|---|
Actual, express | What the partners have expressly agreed he may do | The deed or a resolution |
Actual, implied | Acts done to carry on, in the usual way, business of the kind carried on by the firm | Section 19(1) |
Apparent or ostensible | What a partner in such a firm would usually be able to do, on which an outsider may rely | Section 19(1) read with Section 20 |
Emergency | Acts to protect the firm from loss, as a person of ordinary prudence would do in his own case | Section 21 |
- The excluded acts. Section 19(2) lists eight acts outside implied authority, such as arbitration, compromising claims and transferring the firm's immovable property; these need express authority.
4. Restriction of Authority, and the Firm's Liability
i. Restriction, Section 20. The partners may by contract extend or restrict a partner's implied authority; but an act within implied authority still binds the firm unless the outsider knows of the restriction, or does not know or believe the person to be a partner.
ii. Firm's liability for a partner's act. Where the act binds the firm, every partner is liable jointly and severally under Section 25; the firm also answers for a partner's wrongful acts and misapplication in the ordinary course under Sections 26 and 27.
iii. Ratification. An act beyond authority may still bind the firm if the partners ratify it, on the ordinary principles of agency preserved by Section 3.
5. The Agency Ends on Dissolution, Subject to Winding Up
§ Section 47 After dissolution, the authority of each partner to bind the firm, and the mutual rights and obligations of the partners, continue so far as necessary to wind up the affairs of the firm and to complete transactions begun but unfinished, but not otherwise. So: selling the stock, collecting debts, paying creditors and completing a half-finished contract are within the winding-up authority; starting new business is not. The insolvent partner. The firm is in no case bound by the acts of a partner adjudicated insolvent, subject to the holding-out rule. |
6. A Partner Distinguished
Compared with | The other relationship | A partner |
|---|---|---|
An agent | Acts for a principal; is not bound by the principal's other agents; need not share profits | Is agent and principal; is bound by his co-partners' acts; shares profits |
An employee | Works under control for wages; shares no profits or losses; cannot bind the firm | Co-owns the business; shares profits; binds the firm under Section 18 |
An independent contractor | Does a job for a price; bears his own risk; has no share in the business | Co-owns the business and shares its profits and losses |
- The recurring test. Sharing profits, or being paid out of them, does not make a partner: Section 6. What makes a partner is carrying on the business, acting for one another, with mutual agency.
7. Frequently Asked Questions
Why is every partner both an agent and a principal?
Because Section 18 makes each partner an agent of the firm, and the reciprocity of it means each is also bound as a principal by the acts of the others.
How does mutual agency differ from ordinary agency?
In ordinary agency one person is principal and the other agent; in a firm each partner is both at once, and all the partners are bound and personally liable.
Does a partner's authority continue after dissolution?
Only so far as necessary to wind up the firm and complete unfinished transactions, under Section 47.
Is a person who shares profits always a partner?
No. Under Section 6, sharing profits is only evidence; the true test is mutual agency, so an employee or lender paid out of profits is not a partner.