Indian Partnership Act
Relations of Partners to Third Parties: Sections 18 to 30
Chapter IV faces outward. It answers the questions an outsider asks: can this partner bind the firm, is the firm answerable for what he did, whom can I sue, and for how much? The answers rest on agency (Sections 18 to 24), liability (Sections 25 to 27), appearances (Section 28, holding out), and the position of two persons who are close to the firm but not quite partners: the transferee of a share (Section 29) and the minor admitted to its benefits (Section 30). This note covers the chapter as a whole.
Chapter IV arranged around the firm, contract and tort compared, and the order in which to analyse a problem
1. The Structure of the Chapter
Sections | Theme | Content |
|---|---|---|
18 to 22 | Authority | Partner as agent; implied authority and the excluded acts; extension and restriction; emergency; the mode of acting |
23 and 24 | Evidence and knowledge | Admissions by a partner; notice to an acting partner as notice to the firm |
25 to 27 | Liability | Joint and several liability for acts of the firm; wrongful acts; misapplication of money or property |
28 | Appearances | Liability by holding out, also called partnership by estoppel |
29 and 30 | Others connected with the firm | Rights of a transferee of a partner's interest; a minor admitted to the benefits of the firm |
2. Liability for Acts of the Firm: Section 25
§ The central provision 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. Unlimited. A partner's personal estate answers after the firm's property is exhausted; Section 49 governs the order of application. Only while a partner. Not for acts before he joined (Section 31), and not for acts after he ceases, once public notice is given (Section 32). |
3. Wrongful Acts and Misapplication: Sections 26 and 27
Provision | When the firm is liable | Illustration |
|---|---|---|
s. 26: wrongful acts | Where by the wrongful act or omission of a partner acting in the ordinary course of the business, or with the authority of his partners, loss or injury is caused to a third party, or a penalty is incurred, the firm is liable to the same extent as the partner | A partner, to win business for the firm, bribes a rival's clerk for confidential information: Hamlyn v Houston & Co., [1903] 1 KB 81 |
s. 27(a): misapplication by a partner | Where a partner acting within his apparent authority receives money or property from a third party and misapplies it | A client hands money to one partner of a firm of solicitors for investment, and he pockets it |
s. 27(b): misapplication by any partner | Where the firm in the course of its business receives money or property from a third party and it is misapplied by any partner while it is in the custody of the firm | Money received by the firm's office and later misappropriated by a partner |
- The common thread. The firm answers for what happens in the ordinary course of its business. Between themselves, the firm may recover from the guilty partner under Sections 10 and 13(f).
4. Holding Out: Section 28
§ Liability by appearance • The rule. Anyone who by words spoken or written, or by conduct, represents himself, or knowingly permits himself to be represented, as a partner in a firm, is liable as a partner to anyone who has, on the faith of any such representation, given credit to the firm. • Both limbs needed. A representation, and credit given on the faith of it. A person who never knew of the representation cannot rely on it. • Rights. The person held out gets no rights against the firm; he incurs liability only. • After death. Where a partner dies and the business continues in the old firm name, the continued use of that name or of the deceased partner's name does not by itself make his legal representatives or his estate liable for acts of the firm done after his death. |
5. Transfer of a Partner's Interest: Section 29
Stage | What the transferee gets |
|---|---|
While the firm continues | Only the right to receive the share of profits of the transferring partner, and he must accept the account of profits agreed to by the partners. He cannot interfere in the conduct of the business, require accounts, or inspect the books |
On dissolution, or when the transferring partner ceases to be a partner | The right, as against the remaining partners, to receive the share of the assets to which the transferring partner was entitled, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution |
6. The Minor: Section 30
i. Admission. With the consent of all the partners for the time being, a minor may be admitted to the benefits of an existing firm; he cannot be a partner.
ii. Rights and liability. A share of the property and profits as agreed, and access to and inspection and copies of the firm's accounts; his share is liable for the acts of the firm, but he is not personally liable.
iii. Election on majority. Within six months of attaining majority, or of obtaining knowledge that he had been admitted to the benefits, whichever is later, he must elect by public notice whether to become a partner. If he does not, he becomes a partner on the expiry of that period.
iv. If he becomes a partner, he is personally liable for all acts of the firm since he was admitted to the benefits; if he elects not to, his share is not liable for acts after the date of the notice, and he may sue for his share.
7. Contractual and Tortious Liability Compared
Basis | Contractual | Tortious |
|---|---|---|
Source | A partner acting within actual or implied authority, or an act later ratified | A wrong committed in the ordinary course of the business or with the partners' authority |
Sections | 18 to 22, with 25 | 26 and 27, with 25 |
Nature of liability | Joint and several | Joint and several |
Firm's recourse | Ordinary rules of contribution | Sections 10 and 13(f) against the guilty partner |
Outsider's protection | Implied authority and Section 20 | The ordinary course test |
8. Frequently Asked Questions
Is a firm liable for a partner's fraud on a customer?
Yes, where the partner was acting within his apparent authority or in the ordinary course of the business, under Sections 26 and 27; the firm may then recover from him under Section 10.
Who is a partner by holding out?
A person who represents himself, or knowingly allows himself to be represented, as a partner, and is liable to anyone who gave credit to the firm on the faith of it: Section 28.
What rights does a transferee of a partner's share have?
Only to receive the agreed share of profits while the firm continues, and, after dissolution or the partner's exit, the share of assets with an account from that date: Section 29.
Is a minor liable for the firm's debts?
No. Only his share in the firm is liable, unless on attaining majority he elects, or is deemed, to become a partner.