Topic 37 LLP as Agent No Mutual Agency Section26

THE LEGAL BRIDGE

Judiciary Examination Study Material

Topic 37

LLP as Agent — No Mutual Agency

Section 26: Partner as Agent of LLP Only — Not of Co-Partners

Pillar 4 — LLP Agreement, Partner Rights & Obligations (Sections 22–31)

Module Overview

Section 26 of the LLP Act, 2008 establishes the agency architecture of the LLP — making each partner the agent of the LLP (not of other partners), and providing the conditions under which the LLP is and is not bound by a partner's acts. The complete absence of mutual agency — contrasted with Section 18 of IPA 1932 — is the LLP's most structurally significant governance feature.

37.1 Section 26 — Full Text

Section 26 — Partner to be Agent of LLP

Every partner of a limited liability partnership is the agent of the limited liability partnership for the purpose of the business of the limited liability partnership, but not of other partners thereof: Provided that a partner shall not have authority to bind the limited liability partnership if— (i) he has in fact no authority to act for the limited liability partnership in the particular matter; and (ii) the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership.

37.2 Agency Architecture — Section 26 vs Section 18 IPA

Relationship	IPA 1932 (Section 18)	LLP Act 2008 (Section 26)
Partner — Firm	Agent of the firm	Agent of the LLP
Partner — Co-partners	Agent of ALL other partners	NOT agent of other partners
Binding effect	Firm AND all other partners are bound	Only the LLP is bound; co-partners personally safe
Third-party claim	Against firm and each individual partner personally	Against the LLP only (unless S.30 fraud)
Unauthorized act	Partners bound unless third party knew of no authority	LLP not bound IF (i) no authority AND (ii) third party knew or didn't know person was partner

37.3 Three Key Principles of Section 26

Principle 1 — Partner as LLP's Agent

A partner acting in LLP business binds the LLP — as an agent binds a principal. The LLP is the principal; the partner is the agent. This is unilateral — the LLP is bound; other partners are not.

Principle 2 — "But Not of Other Partners" — No Mutual Agency

The critical "but not of other partners thereof" clause eliminates mutual agency completely. Partner A's acts in LLP business bind the LLP — but never bind Partners B or C personally. A creditor wronged by Partner A cannot proceed against B or C's personal assets. This is the core protection that makes the LLP commercially safe for passive and sleeping partners.

Principle 3 — The Proviso: When LLP is NOT Bound (Both Conditions Must Exist)

Condition	Requirement	Effect if Absent
(i) No authority	Partner had no actual or implied authority for the act	If partner had authority (express or ostensible), LLP IS bound even if act was wrongful
(ii) Third party knew or was a stranger	Third party KNEW of the lack of authority OR did not know/believe the person was a partner	If third party dealt in good faith believing partner had authority (ostensible authority), LLP IS bound despite lack of actual authority

Critical: BOTH Conditions Must Be Present for LLP to Escape Liability

If the third party dealt with the LLP in good faith, reasonably believing the partner had authority (ostensible authority), the LLP IS bound — even without actual authority. The proviso requires knowledge of lack of authority. This protects third parties acting in good faith and keeps commercial dealings efficient.

37.4 Types of Authority Under Section 26

Type	Description	Source
Express authority	Explicitly granted by LLP agreement or resolution	LLP agreement partner authority provisions; NCLT/LLP resolutions
Implied authority	Implied from the partner's role and usual LLP activities	Partner's usual conduct; nature of LLP's business
Ostensible/Apparent authority	LLP has allowed partner to appear to have authority to third parties	LLP's conduct, prior dealings, representations to third parties
Ratified authority	Unauthorised act approved post-facto by LLP	Post-incorporation ratification; converts unauthorized act to authorized

37.5 Practical Illustration — Unauthorised Loan

Scenario: Partner A takes an unauthorised loan of Rs.50 lakhs in the LLP's name

IPA 1932 (Section 18 + 25): ALL partners jointly and severally liable. Bank can sue all partners personally — including B and C who had no knowledge of the loan.

LLP Act — if A had ostensible authority (bank reasonably relied on A's partner status): LLP IS bound (Section 26); only LLP assets liable; B and C fully protected (Sections 27(3) and 27(4)).

LLP Act — proviso applies (bank knew A had no authority): LLP NOT bound. Neither LLP nor B/C bear the loss. Bank bears the consequence of dealing without verifying authority.

⚖ Mercantile Credit Co. Ltd. v. Garrod [1962] 3 All ER 103 (QB)

Held: A partner in a garage sold a car without authority — the firm's agreement restricted activity to repairs only. Court held the firm liable because selling cars was within the class of acts usually done by a garage business — the partner had ostensible authority. Applied to LLP Section 26: LLP bound even if internal restriction existed, because the third party could reasonably rely on ostensible authority.

Principle: Ostensible authority is assessed by what a person in that position would normally have authority to do — not by internal restrictions unknown to the third party.

⚖ Hamlyn v. John Houston & Co. [1903] 1 KB 81 (UK CA)

Held: A partner bribed a competitor's employee while acting in course of partnership business. The firm was held liable. Applied to LLP: Section 27(1) read with Section 26 makes the LLP liable for a partner's act in course of LLP business — even if wrongful or unauthorised — as long as the third party dealt with the partner in the context of LLP business.

Principle: The LLP's liability under Section 27(1) + Section 26 extends to wrongful acts done in course of LLP business — the LLP cannot disclaim by saying the act was unauthorised.

📌 EXAM TIP: Section 26 is examined in three formats: (1) "Under Section 26, a partner is agent of ___." — the LLP — NOT of other partners. (2) "Is there mutual agency between LLP partners?" No — Section 4 excludes IPA Section 18; Section 26 makes partner agent of LLP only. (3) "When is LLP NOT bound by a partner's act?" BOTH conditions must be true: (i) no authority AND (ii) third party knew of no authority or didn't know person was partner. The "both conditions" requirement is the classic exam trap.

✔ PRACTICAL NOTE: In LLP agreements, always include an explicit "authority matrix" — specifying which partners have authority to execute contracts above certain values, borrow money, sell LLP assets, or hire employees. This creates a clear record of actual authority, reduces the risk of the LLP being bound by ostensible authority in unintended transactions, and provides a defence if a third party had notice of the restrictions.

Quick Revision — Topic 37

Key Point	Core Content
Section 26 main rule	Partner = agent of LLP only — NOT agent of co-partners
Section 4	Excludes IPA — eliminates mutual agency (IPA Section 18)
LLP bound when	Partner had authority (express/implied/ostensible) OR third party dealt in good faith
LLP NOT bound	BOTH: (i) no actual authority + (ii) third party knew of no authority OR didn't know person was partner
vs IPA S.18	IPA: partner = agent of firm AND all co-partners; LLP: partner = agent of LLP only
Ostensible authority	LLP bound even with internal restriction — if third party reasonably relied on partner's apparent authority
Types of authority	Express; implied; ostensible; ratified