The kind of acts for which partners are liable
a) Acts done within the authority of a partner which may be either express or implied ‘Authority’ means the capacity to bind the other by one’s act. Here, it is the act of a partner to bind the firm. This capacity or authority derives from Section 2 (a) which defines “act of firm” as “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.”
Section (4) of IPA, also speaks of the binding element thought the words “acting for all”. Even, it is clearly manifested by Section 18 which states, “partners to be agent of the firm.”
Thus, the authority may be express or implied.
Express authority – Express authority is given under the terms of the contract. Because, the contract as is the result of the free will of the parties, they themselves decide and provide the authority under the terms of the contract itself.
Implied authority – Implied means understood. The reasons why the implied authority is given are as follows:
(a) Always, it is not possible for any contract to lay down or agree upon all the minor aspects of the business or affairs, in the form of writing.
(b) Implied authority is a necessity. Otherwise, there may be hindrance everywhere and smooth running of the business is not possible.
(c) As the partnership is the product of mutual agency the element of mutual agency is of no use without implied authority.
The scope of implied authority has been explained by Section 19(1) as under:
“The act of a partner which is done to carry on, in the usual way, business of the bind carried on by the firm, binds the firm.”
b) For an act to be covered within the implied authority it is necessary that
– Act should be done in relation to the partnership business
– The act should be done in usual way, in relation to a business of the Kind carried on by the firm.
Firm can be a trading firm or non-trading firm. The examples of non-trading firms are contractors’ firm, engineers’ firm, coaching firm, solicitors’ firm etc. A partner has more implied authorities in trading firms than in the non-trading firms. For example, the issue of negative instruments, borrowing and lending money frequently, which is not usual for a non-trading firm.
One more point is that the partner has implied authority, to do an act, which is, in the usual way. But, if he wants to do any act, in the unusual way, he has to take the consent of the firm.
Cases:
i) Mercantile Credit Company Ltd. v. Garrod – Firm carried on garage business concerned with testing and repairing of cars.
– Sale of second hand cars by one of the partners could be impliedly considered to be
business of the firm although no express authority had been given for same.
Therefore, other partner of the firm could be made liable. It was also held that the firm is a trading firm and it can borrow money.
ii) Llyod v. Grace Smith & Co. – The principal is liable for the act of the agent if the act is within the scope of agent’s authority even though the agent may be acting for his personal gain and principal may not be knowing of transactions.
iii) Similar decision was given in Hamlyn v. John Houston & Co. where one of the partners committed a tort of inducing breach of contract by bribing the clerk of rival business in order to know the secrets.
However, it is necessary that the act done by a partner must be done to carry, in the usual
way, business of the bind carried on by the firm.
Cases:
i) Wheatley v. Smith – In a non-trading business, for example, that of an auctioneer, a partner
cannot borrow money because an auctioneer is not a trader as his business was not for buying or selling of goods.
Similar decision was given in following two cases:
i) Higgins v. Beauchamp – An active partner of cinema proprietors borrowed money. Held that business of the firm was not a trading one and therefore the firm was not bound by loan taken by one partner.
ii) Porbandar Commercial Co-operative Bank Ltd. v. Bhanji Lavji – The bank advanced two separate loans to a person and in respect of each loan one of the partners of two different firms stood as guarantees. It was held that the business of either of the firm was not to underwrite loan transaction of the third parties by standing as sureties and therefore no partner of the firm had an implied authority to do such act so as to bind the other partners of the firm.
iii) R. Sona vs. Padmavathi – In this case, it was held that, firms of engineers and contractors, are non-trading firms and cannot borrow money. And, if any partner borrows, then that will not bind the firm.
iv) Tom Limron vs. Broad Smith – In this case, it was held that appointment of an advocate is
an implied authority. Because, it is the need of the firm, for advice, dealing with the cases etc.
So, it is well within the binding authority of a partner.
Section 19(1) which defines implied authority is subject to provisions of Section 22. In order
to bind a firm the act of partner must be done in a manner mentioned in Section 22 which reads
“In order to bind a firm an act done or instrument executed by a partner or other person on behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm.”
It has been held in number of cases that when a partner signs an instrument or executes a document without clearly indicating that he is acting as partner or on behalf of others, although the name of the firm is mentioned on letter head or after his signatures that does not create liability of other partners. At the best the use of letter head only helps to ascertain the address of the executant but that cannot advance the case any further.
Cases:
The following observation of Privy Council in:
i) Janbidar v. Kishen Prasad may be noted. “It is not sufficient that principal’s name should
be ‘in some way’ disclosed it must be disclosed in such a way that on fairy interpretation of
the instrument his name is real name of person upon the instrument.”
ii) John Stone v. Jan Bibi – One of the two partners signed a promissory note on a note paper
on which the name of the firm was printed, without indicating that he was signing as a partner or on behalf of the firm. It was held that he alone was liable and not the other partners.
Similar decision was given in:
iii) Punjab United Bank Ltd. v. Mohd. Hussain (Promissory note)
iv) Chisnlal v. Hazi Mohd. (Promissory note)
v) Sitaram v. Chiman Das (Hundies with firm address)
vi) Rajagopal v. Imam Ali – A partner of the firm signed number of promissory notes describing in some as ‘proprietor’ and in some as ‘Managing partners’. The notes were neither signed on behalf of the firm nor was there any intention to show that notes were executed for the firm it was held that the use of letter head only helps to ascertain the address of the executant and were more descriptive of person signing. Therefore, no other partner could be made liable.
When an act is done on behalf of the firm the other partners are also liable even the dormant
partner.
Case:
Bekham v. Drake
It may be noted that merely because a partner has acted on behalf of his firm and thus satisfied the requirements of Section 22 does not render the other partners liable. It is also necessary that the basic requirement of Section 19(1) gets satisfied. Thus, if a partner takes
the loan or stands as a surety on behalf of the firm when implied authority does not warrant
the same, the firm will not be liable for the same. (Porbandar Commercial Bank Ltd. v. Bhanji Lavji)
The scope of implied authority of a partner has been limited through statutory restrictions contained in Section 19(2).
Section 19(2):
In the absence of any usage or custom of trade to the contrary the implied authority of a partner does not empower him to
i) Submit a dispute relating to the business of the firm to arbitration.
ii) Open a banking account on behalf of the firm in his own name.
iii) Compromise or relinquish any claim or portion of a claim by the firm.
iv) Withdraw a suit or providing filed on behalf of the firm.
v) Admit any liability in a suit or proceeding against the firm.
vi) Acquire immovable property on behalf of the firm.
vii) Transfer immovable properly belonging to the firm.
viii) Enter into partnership on behalf of the firm.
A limit on implied authority of the partner could also be imposed through an agreement between partners as permitted by Section 20. The implied authority can also be extended by
contract, or by usage or custom.
Section 20:
The partners in a firm may, by contract between the partners, extend or restrict the implied
authority of the partner.
Notwithstanding any such restrictions, any act done by a partner on behalf of the firm which
falls within his implied authority binds the firm, unless the person with whom he is dealing knows of restriction or does not know or believe that partner to be a partner.
There is a difference between the statutory restriction imposed on implied authority by Section 19(2) and restriction imposed under Section 20 by contract among the partners. The
statutory restrictions are effective against all the third parties as they are deemed to be having the knowledge of restrictions.
The logic behind providing such statutory restrictions is that these are all important matters
and it is in the interest of the firm as well as the dealing public.
The third parties, however, cannot be presumed to be having the knowledge of the restriction
which the partners may impose by a contract between themselves and therefore a third party
can be bound by a restriction imposed under Section 20, if he had the actual knowledge of such restrictions i.e. if they know about the restriction or that the party with whom they are dealing is not a partner.
Thus, if the restriction placed on implied authority is not known to the third party the firm
would be liable to such third party.
However, if there is a restriction on the implied authority of the partner and if that partner acts against it, it is binding on the firm. Because, the principle of estoppel applies here, so as to protect the interests of the innocent person.
Case:
i) Motilal v. Unnad Commercial Bank
A restriction was placed by on the partners to borrow money by an agreement one of the
partners borrowed money without any third party knowing about such restrictions. The firm
was held to be liable since third party did not knew of restriction.
On the other hand, if the fact of the restriction on implied authority is known to third party the
firm is not bound and not liable.
Cases:
i) Prem Bhai v. Brown – One of the partners of the firm was authorised to draw bills on the
firm only to extent of Rs. 200 each. This fact was known to third party in whose favour a
partner made promissory notes for Rs. 1000. The firm was held not to be liable as restriction
on implied authority was within the knowledge of the third party.
ii) Partners’ authority in an emergency – A partner has authority in an emergency to do all
such acts for the purpose of protecting the firm from loss as would be done by a person of
ordinary prudence, in his own case, acting under similar circumstances, and such acts binds
the firm.
– For any such act the firm would be bound to the third parties.
– The authority conferred by this section is similar to authority conferred upon agent by
Section 189, ICA.
iii) Ratification of a partner’s act – Even if a partner has added without any authority, if the act
is subsequently ratified by the other partners the act will become binding on them.
iv) Admission made by a partner (Section 23)
Section 23: An admission or representation made by partner concerning the affairs of
the firm is an evidence against the firm, if it is made in ordinary course of business.
– This is because every partner is the agent of the firm for firm business.