Indian Partnership Act
Relations of Partners to One Another: Sections 9 to 17
Chapter III governs the inside of a firm: what partners owe each other, what each may demand, what belongs to the firm rather than to a partner, and what happens to all of this when the firm changes. Two ideas run through it. First, good faith: Sections 9 and 10 impose a fiduciary standard that no deed can dilute. Second, freedom of contract: Sections 12 to 17 all begin 'subject to contract between the partners', so the deed prevails on almost everything else. This note covers the whole chapter.
What a partner owes and what a partner gets under Sections 9 to 17, and which rules can be varied by contract
1. General Duties: Section 9
§ The fiduciary core Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Greatest common advantage. A partner must work for the firm's benefit, not his own; a personal advantage gained out of the firm's business must be accounted for under Section 16. Just and faithful. Partnership is a relationship of utmost good faith, closer to a fiduciary relation than to an ordinary commercial contract. True accounts and full information. Nothing affecting the firm may be concealed from a partner; the duty extends to a deceased partner's legal representative. Not subject to contract. Unlike the later sections, Section 9 contains no saving for contrary agreement: partners cannot agree to be unfaithful. |
📖 Bentley v Craven, (1853) 18 Beav 75 A partner who was the firm's buyer bought sugar on his own account and sold it to the firm at a profit, without disclosure. He was held bound to account to the firm for the profit: a partner may not make a secret gain out of the firm's business. The principle is now in Sections 9 and 16. |
2. Indemnity for Fraud: Section 10
i. The rule. Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
ii. Absolute. Section 10 is not 'subject to contract'; an agreement excusing a partner's fraud would defeat the very basis of the relation.
iii. Contrast with Section 13(f), which deals with wilful neglect and is subject to contract. Fraud can never be excused; negligence can be dealt with by agreement.
iv. Third parties are protected separately by Sections 25 to 27: the firm answers to the outsider first, and then recovers from the guilty partner.
3. Determination of Rights and Duties by Contract: Section 11
§ Section 11 (1) Subject to the provisions of the Act, the mutual rights and duties of the partners may be determined by contract between the partners, which may be express or implied by a course of dealing; and such contract may be varied by consent of all the partners, which consent too may be express or implied by a course of dealing. (2) Notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner. |
Point | The position |
|---|---|
Express or implied | A written deed, an oral agreement, or a settled course of dealing between the partners |
Variation | Only by the consent of all; a majority cannot vary the contract, though it may decide ordinary matters under s. 12(c) |
Implied variation | Where partners act consistently for a period on a different footing, for example a changed profit ratio, consent may be inferred from conduct |
Restraint of trade | s. 11(2) permits a restraint on a partner carrying on any other business during the partnership, notwithstanding s. 27 of the Contract Act |
Other restraints | s. 36(2) for an outgoing partner and s. 54 on dissolution permit reasonable restraints; the test is reasonableness of the limits as to place, trade and period |
Limits | The contract cannot override provisions that are not subject to contract, such as ss. 9 and 10, nor prejudice third parties |
4. Conduct of the Business: Section 12
i. (a) Every partner has a right to take part in the conduct of the business.
ii. (b) Every partner is bound to attend diligently to his duties in the conduct of the business.
iii. (c) Differences on ordinary matters may be decided by a majority, every partner having the right to express his opinion first; but no change in the nature of the business may be made without the consent of all the partners.
iv. (d) Every partner has a right to have access to and to inspect and copy any of the books of the firm.
v. (e) On a partner's death, his heirs or legal representatives, or their duly authorised agents, have the same right of access to and inspection of the books.
5. Mutual Rights and Liabilities: Section 13
Clause | The default rule |
|---|---|
13(a) | No remuneration for taking part in the conduct of the business |
13(b) | Profits shared equally, and losses contributed equally |
13(c) | Interest on capital, where agreed, is payable only out of profits |
13(d) | Interest at six per cent a year on payments or advances beyond agreed capital |
13(e) | The firm indemnifies a partner for payments and liabilities in the ordinary and proper conduct of the business, and for acts done in an emergency to protect the firm from loss |
13(f) | A partner indemnifies the firm for loss caused by his wilful neglect |
6. The Property of the Firm: Sections 14 to 16
§ Section 14: what is firm property Subject to contract, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Explanation. Unless a contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm. |
§ What follows • A partner's interest. A partner has no specific share in any individual asset of the firm. His interest is in the whole: the right to share profits, and on dissolution to a share of the surplus after debts are paid. • Movable property. In Addanki Narayanappa v Bhaskara Krishnappa, AIR 1966 SC 1300, the Supreme Court held that a partner's interest in the firm is movable property, even where the firm's assets include immovable property, and a document recording a partner's relinquishment of his share does not require registration on that account. • Section 15: application. Subject to contract, the property of the firm shall be held and used by the partners exclusively for the purposes of the business. • Section 16(a): personal profits. A partner who derives a profit for himself from any transaction of the firm, or from the use of the property, business connection or name of the firm, must account for it and pay it to the firm. • Section 16(b): competing business. A partner who carries on a business of the same nature as and competing with the firm must account for and pay to the firm all profits made in that business. |
📖 Aas v Benham, [1891] 2 Ch 244 A partner in a firm of shipbrokers used information gained in the firm's business to advise a shipbuilding company, and was paid for it. The Court of Appeal held that he did not have to account: the profit came from a business outside the scope of the firm's activities. The duty to account attaches to profits from the firm's own business, property or connection, not to every use of knowledge gained as a partner. |
7. Rights and Duties after a Change: Section 17
Situation | The rule |
|---|---|
After a change in the constitution of the firm | The mutual rights and duties of the partners remain the same as they were immediately before the change, as far as may be |
After the expiry of a fixed term | Where a firm constituted for a fixed term continues to carry on business after the expiry, the rights and duties remain as before, so far as they may be consistent with the incidents of a partnership at will |
Where additional undertakings are carried out | Where a firm constituted to carry out one or more adventures or undertakings carries out others, the rights and duties in respect of the others are the same as in respect of the original |
- Subject to contract, and to Section 16. Section 17 fills gaps; the deed may provide otherwise, and the duty to account for personal profits continues in every case.
8. Frequently Asked Questions
Can partners contract out of the duty of good faith?
No. Sections 9 and 10 are not subject to contract; the duty to be just and faithful and to indemnify the firm for fraud cannot be excluded.
Can a partnership agreement restrain a partner from other business?
Yes. Section 11(2) permits it notwithstanding Section 27 of the Contract Act, and Sections 36(2) and 54 permit reasonable restraints on an outgoing partner and on dissolution.
Does a partner own a share in each asset of the firm?
No. His interest is in the firm as a whole: profits while it runs, and a share of the surplus on dissolution.
Must a partner account for profits from a business of his own?
Yes, if it is of the same nature as and competing with the firm's business, under Section 16(b), or if the profit came from the firm's transactions, property, connection or name, under Section 16(a).