RELATIONSHIP BETWEEN PARTNERS

AND THIRD PARTIES (OUTSIDER)

PREPARED BY DALILA BINTI AMIR
UITM PAHANG
LEARNING OUTCOMES
• Explain the liability of partners for debts and contractual obligations.
• Explain the nature of the liability.
• Explain the other liabilities of partner.
• Apply the law in determining whether the firm or other partners are liable or not to a
third party for the act of the other partners.
LIABILITY OF PARTNERS FOR DEBTS
AND CONTRACTUAL OBLIGATIONS
•Section 7 – Section 10 of Partnership Act

OTHER LIABILITIES OF PARTNETRS

•Section 12, 13, 15, 16 & 19 of Partnership Act

 ❖ In the events of
breached, 3rd Parties
can sue all of the
partners or the firm as Purchasers
a whole Workers
LABU & LABI
Financial Institutions
❖ Make contracts with
Suppliers
any 3rd
parties/outsiders

ON CONDITIONS :-
1. The act of a partner must be within his actual or apparent authority.
2. The act must be done for the purpose of the business of the partnership OR in
relation to the partnership business.
3. The act must be done in the firm’s ordinary course of business or in the usual way of
business.
4. The act must be done by the partner as a partner of the firm and not in his own
personal capacity.
1- The act of a partner must be within his actual or apparent authority.

• S 7 of the PA the main section for liability of partner : “Every partner is

an agent of the firm and his other partners...

• Principal • Agent

To make Principal bound by the act of Agent,

Agent must act within the scope of
his power either actual or apparent power.

• 3rd Party
Agency principle

* actual authority- as agreed in agreement either expressed or implied.

* apparent authority arises when the partners hold out to others that he has
authority, while in fact he has no.

E.g. The agreement states Labu has no power to buy goods > RM10,000. Labu
buys goods RM15,000 from Haji Bakhil in front of Labi & Labi just keep quiet. In
any event of non-payment by Labu, Haji Bakhil can sue the firm as a whole (Labi
will liable towards the debt).
• For the apparent authority to be effective, the third party must not know that
the person with whom he is dealing has in fact no
authority from his partner to engage in the particular transaction on
behalf of the firm.

• S 10 -“If it has been agreed between the partners that any restriction shall be
placed on the power of any or more of them to bind the firm, no act done in
contravention of the agreement is binding “on the firm with respect to
persons having notice of the agreement”

• Haji Bakhil must not have knowledge or notice of the restriction.

• Case : Sithambaran Chetty v Hop Hin

: Mercantile Credit Co v Garrod
 Merchantile Credit Co. Ltd v Garrod
• Facts : Parkin was a partner in a firm carrying on garage business mainly concerned
with letting lock-up garages and repairing cars. Garrod was a sleeping partner. There is
a clause in the partnership agreement which prohibits the buying and selling cars.
Parkin, without Garrod’s authority, sold a car which he has no tittle over it to
Merchantile Credit for 4700. When the company found out that Parkin has no title over
the car, the company claimed the $700 from Garrod.
• Held : Garrod, as a partner was liable for the act of his partner because Merchantile
Credit did not know of the restriction in the agreement.
2- The act must be done for the purpose of the business of the partnership or in
relation to the partnership business.

• S 7 ; “Every partner is an agent of the firm and his other partners for the
purpose of the business of the partnership;…

• S 9 --“Where one partner pledges the credit of the firm for a purpose
apparently not connected with the firm’s ordinary course of business, the
firm is not bound , unless he is in fact specially authorised by the other
partners...”

• case : Chan King Yue V Lee & Wong

: Osman b. Hj . Mohd Usop V Chan Kong Sw
 Chan King Yue V Lee & Wong
• Facts : Plaintiff ’s Husband borrowed money from her for his firm. He gave her a receipt
under the firm’s name and the money was credited to the partnership account.
There was no payment made for the loan and the Plaintiff took action against the
firm. The other partner contended that the Plaintiff’s husband has no authority to
borrow on behalf of the firm.
• Held : Borrowing money was an act necessary for carrying on the partnership business.
Therefore the other partner are bound by the Plaintiff ’s husband’s action.
Merchantile Credit Co. Ltd v Garrod
• Facts : Parkin was a partner in a firm carrying on garage business mainly concerned
with letting lock-up garages and repairing cars. Garrod was a sleeping partner. There
is a clause in the partnership agreement which prohibits the buying and selling cars.
Parkin, without Garrod’s authority, sold a car which he has no tittle over it to
Merchantile Credit for 4700. When the company found out that Parkin has no title over
the car, the company claimed the $700 from Garrod.
• Held : The action succeeded. The sale of the car to the company was an act for
carrying on in the usual way business of the kind carried on by a firm. Therefore, the
firm is accordingly bound.
3- The act must be done in the firm’s ordinary course of business or in the usual
way of business.

• S 7 --“… and the act of every partner who does any act for carrying on in the usual
way business of the kind carried on by the firm of which he is a member bind the
firm and his partner...”

• ordinary course or usual way of business?

• Question of facts. For the court to determine from the facts of the case.

• Case : Bank of Australasia v Breillat

: Beckham v Drake
: Porter v Taylor
: Court v Berlin
: Mercantile Credit Co v Garrod
: Higgins v. Beauchamp
• Ordinary course or usual way of business?

Mahoney J in Walker’s in Walker v European Electronics Pty Ltd. depends on

what the business of the firm is.

If business is defined a question of fact whether the act can be done and
was done in the course of carrying it.

If the biz is not defined whether the acts are apt to be done in carrying it.

Whether receivership work was within the ordinary course of business of a firm
of accountant.

Held an accountant firm. The biz included the acceptance of appointment

as receiver or receiver and manager and the doing of acts to carry out such
an appointment. This is the kind of activity which accountants of their kind
are apt to do and it is what they habitually did.
 Higgins V. Beauchamp
• Facts : B and Miles are partners in a cinema business. But B was a sleeping Partner. The
partnership agreement provide that no partner should contract any debts on
accounts of a p/ship without consent of other partner EXCEPT in the usual and regular
course of business. Miles borrowed money from H stating that it is for his own use. H
sued B to recover the said money.
• Held : The claim failed as Miles borrowed money for his own used and the business was
not a trading business. Therefore Miles has no authority to bind the firm in respect of
the debt.
4- The act must be done by the partner as a partner of the firm and not in his
own personal capacity.
• If a partner enters into a transaction in his personal capacity, the firm and the other
partner are released from any liability.

• Section 7 must be read together with section 8 which provides that an act or
instruments relating to the business of the firm and done or executed in the firm’s
name which shows the intention to bind the firm is binding on the firm and all the
partners.

• S 8 -“An act …done or executed in the firm’s name , or in any other manner showing
an intention to bind the firm , by any person threreto authorised , whether a partner or
not , is binding on the firm and all the partners.”

• This section extends the liability of the firm and partners to action done by a person
who is not a partner but has authority to act on behalf of the firm.

• case : Re Brigss & co, ex parte wright

 Re Briggs & Co.
• Facts : A firm consisted of a father and a son. The son borrowed money from a creditor
& he assigned the firm’s book’s debt to the creditor. The firm later went bankrupt and
the trustee in bankruptcy sought to set aside the assignment by the son to the creditor
on the ground that it has been executed by one party only.
• Held : The deed of assignment binds the firm & by virtue of section 6 PA (equals with
section 8 Malaysian Partnership Act 1961) it was an instrument relating to a business of
a firm done or executed in a manner showing the intention to bind the firm, and
executed by a person thereto authorized.
• The second limb of Section 7 :
• “…UNLESS the partner so acting has in fact no authority to act for the firm in the
particular matter, and 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.”
• The above provision provides the circumstances where the partner’s action will not
bind the firm:
1. When the partner had no authority at all
2. When the 3rd party know that the partner has no authority
3. The 3rd party does not know or does not believe the partner to be a member of the
firm
NATURE OF LIABILITY FOR CONTRACTS & DEBTS

• S11 - “Every partner in a firm is liable jointly with the other partners for all
debts and obligations of the firm incurred while he is a partner; and after
his death his estate is also severally liable in a due course of administration
for such debts and obligations, so far as they remain unsatisfied but subject
to the prior payment of his separate debts.”

• Existing partner : jointly liable which means full liability of each partner and
Creditor has only one cause of action. If the claim was made towards one
or some of the partner and that person failed to settle the debt, the
person who sues cannot commence a new proceedings against other
partner who are not named in the initial claim.
• Upon death of the partner, his estate is severally liable for the debt incurred
during his lifetime as a partner but subject to the prior payment of his
separate debts.
• Severally liable means – if the claim was made towards one or some of the
partner and that person fail to settle the debt, another action may be
maintained against other partner in respect of the same action.
• If Labu dies before Haji Bakhil make a claim against Labu & Labi & Co. his
estate is severally liable to satisfy the debt incurred during Labu’s life.
• After Labu died, Haji Bakhil sue Labi for the debt. But Labi cannot pay the
judgment (claim), haji Bakhil can make a new claim to recover the
remaining sum from Labu’s estate subject to prior settlement of Labu’s
personal debt and the debt incurred while Labu is alive.
 Kendall V. Hamilton
• Facts : K gave loan to X & Y, partners of a firm. When no payment was made K took
legal action against X & Y. The court ordered X & Y to pay for K’s money. However,
since, X & Y was declare bankrupt, they could not pay. K then realize that H was a
sleeping partner of the firm and he afforded to pay for the debt. So, K commence a
new legal proceeding against H.
• Held : As the liability is a joint liability, the 1st claim prevented any subsequent claim
even though the debt has yet been discharged.

Bagel V. Miller
Facts : Bagel supplied goods to a partnership of which Miller was a member. Some were
ordered and delivered before Miller died, but others were delivered after his death.
Bagel brought an action to recover the price from Miller’s executors.
Held : The action is succeeded in respect of the goods delivered before Miller’s death,
but failed in respect of those delivered afterwards, since the obligation to pay did not
arise while Miller was a partner.
 OTHER LIABILITIES OF PARTNERS

improper
Liability for employment
Liability of Liability of
misapplication of trust
Wrong or incoming and
of money or property for person for Criminal
tortious liability outgoing
property of partnership holding out liability
Sec 12 partners
the 3rd person purposes Sec 16
Sec 19
Sec 13 Sec 15
 WRONG OR TORTIOUS LIABILITY

• S 12 : “Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the firm OR with the authority of his co partners , loss or injury is
caused to any person not being a partner in the firm, or any penalty is incurred, the firm
is liable thereafter to the same extent as the partner so acting or omitting to act.”
• The firms and the other partner is liable for any loss or injury caused to any 3rd party
provided that:
1. if the partners done/committing the act in the ordinary cause of the business; or
2. If it was not done in ordinary course of the partnership business; the act must be done
with the authority of their co-partners.
• All the partners in accounting firm would be liable for loss suffered by client if any of the
partners had been negligent in the handling of the account.
 Hamlyn v Houston & Co
• Facts : A partner in Houston & Co bribed a clerk in a rival firm to disclose to him confidential
information relating to it. The rival firm suffered lost and sued the firm for damages.
• Held : The action is succeeded. Houston & Co. were liable for the partner’s wrongful
conduct as he had been acting in the ordinary course of business of the firm. It was
ordinary course of business to obtain information about the trade rival. Whether the partner
did so by legitimate or illegitimate means was immaterial.
 CRIMINAL LIABILITY

• all partners are NOT jointly liable in criminal cases.

Chung Shin Kian & Anor V. Pp

• Facts : The appellant were partners in a partnership. In one of the raid done by the
Ministry of Trade at their tailor shop, it was found that the firm produce clothing under
the brand of ‘textwood’ which is a false brand. Nevertheless, during the raid the 2nd
appellant was not in the premise. The high Court judge decided that both were guilty
of criminal offence. The 2nd appellant appeal.
• Held : The 2nd appellant appeal was allowed as there was no evidence which
showed that he was involve in the crime other than being the partner in the
partnership business.
 LIABILITY FOR MISAPPLICATION OF MONEY OR PROPERTY
OF THE 3RD PERSON

• S 13 “In the following cases, namely :

• where one partner , acting within the scope of his apparent authority , receives the
• money or property of a third person and misapplies it; and

• b) where a firm in the course of its business receives the money or property of a third
• person, and the money or property so received misapplied by one or more of the
• partners while it is in the custody of the firm, the firm is liable to make good the loss.”
• 2 stuations:

• a. Receipt by partner on conditions:

i. within the scope of his apparent authority
ii. Deal with the partner as a partner, not in his personal capacity
• Case : British Homes Assurance Corporation Ltd. V Paterson.

• b. Receipt by firm on conditions :

• i. in the ordinary course of the firm’s business. Case : Rhodes v Moules
• ii. money or property in the firm’s custody.
• Case: Tendering Hundred Waterworks Co v Jones.
 British Homes Corp Ltd V. Patterson
• Facts : The Pf engaged Mr. Atkinson to act as his solicitor regarding a mortgage. Mr. A
was a solicitor of ‘Atkinson & Atkinson’. Later, Mr. A informed the Pf that he had
Patterson into the p/ship and the firm’s name has been changed to ‘Atkinson &
Patterson’. Pf then send a cheque to Mr. A under the name of ‘Atkinson & Atkinson’.
The money then misappropriated. Pf sought to claim the money from Patterson.
• Held : Patterson was not liable because at all time the Pf had dealt with Mr. A as an
individual and not in his capacity of a partner of a firm.

Tendring Hundred Waterworks Co. & Jones

• Facts : J& G were partners in a solicitor’s firm. THW brought property under G’s name.
G hold the property as trustee. G then fraudulently raised money and make a
mortgage using the land. THW brought an action against J.
• Held : J was not liable for his partner’s fraud.
• NATURE OF LIABILITY UNDER S12 & 13.

• S 14 : Joint and several liability.

• Every partner is liable jointly with his co-partner and also severally for everything which
the firm becomes liable whilst he is partner.
• Each partner can be sued in turn or all together until the full amount is recovered.
• A second action may be brought against the other partner in case the judgment of
the first action remains unsatisfied.
 LIABILITY FOR IMPROPER EMPLOYMENT OF TRUST PROPERTY
FOR PARTNERSHIP PURPOSES

• S 15 : “If a partner, being a trustee, improperly employs trust property in the business or on
the account of the partnership, no other partner is liable for the trust property to the
persons beneficially interested therein:

• Provided as follows: a) this section shall not affect any liability incurred by any partner
by reason of his having notice of a breach of trust; and
b) nothing in this section shall prevent trust money from being
followed and recovered from the firm, if still in its possession or
under its control.”

Example : Tiga Abdul whereby Sulaiman Akhlakan as appointed trustee of the estate Ismet
ulam Raja for the benefit of Abdul Wahab, Abdul Wahub, Abdul Wahib.
 Shannon V Whitting
• Facts : Grey the active trustee of the estate of “J.W.” paid trust money into the firm
account instead of the separate estate trust account.
• Held : All partners in Grey’s firm are liable because Grey had received the money in
the course of estate management, an activity within the scope of his apparent
authority.

Ex Parte Heaton
Facts : A father and a son were partners in a firm. His sons, as trustee of a will have used
the trust money for their firm’s business. The issue was whether the trust money can be
recovered from the partnership property?
Held : the trust money which had been used could not be recovered from the
partnership property.
 LIABILITY OF PERSON FOR HOLDING OUT

• S 16 : “Every one who by words spoken or written or by conduct represents himself, or

who knowingly suffers himself, to be represented, as a partner in a particular firm
is liable as a partner to any one who has on the faith of any such representation
given credit to the firm...”
• There must be representation made by a person or by another person with that
person’s knowledge, that he is a partner.
• The Doctrine based on estoppel.
• Labu & Labi are partner. They have a friend named Ramlee. Labu told Cik Salmah in
front of Ramlee that he is a partner in his firm. Ramlee did not denied it. Believing that
Ramlee is a partner, Cik Salmah lends some amount of money to the firm. Ramlee is
liable for the debt and estopped from denying that he is not a partner.
• Retired partner is liable for the future debts if he does not give notice of his retirement
as stipulated under s 38(1) of PA and Permits his name being used as part of the firm
name.
• Re siew Inn Steamship co : The retired partner was liable because he failed to give
actual notice. Notice in news paper not sufficient for regular customer.
• Tan Sin Moh’s case : The retired partner liable. Old customer was to be specifically
notified of the retirement. No special notice given. Notice to ROB was insufficient.

Tower Cabinet Ltd V. Ingram

• Facts : Christmas & Ingram were partners in ‘Merry’s’. Their partnership was dissolved on
1947. But Christmas continued the business under the same name. In 1948, the P, Tower
Cabinet Ltd which had not previously dealt with Merry’s received an order to supply a
furnitures from Merry’s. However, Merry’s never paid. Therefore, the P sued Ingram and
Merry’s for recovery of the amount.
• Held : Ingram was not liable because the P had no knowledge about Ingram’s
connection with Merry’s except for the name on the note paper. He had not
knowingly suffered himself to be represented as a partner in Merry’s.
 LIABILITY OF INCOMING AND OUTGOING PARTNERS

• Incoming partner
• S 19(1) : “A person who is admitted as a partner into an existing firm does not
hereby become liable to the creditors of the firm for anything done
before he became a partner.” unless agrees to be liable(novation)
• Outgoing partner
• S19(2): “A partner who retires from a firm does not thereby cease to be liable
for partnership debts or obligations incurred before his retirement.”
• S 19(3): “A retiring partner may be discharged from any existing liabilities by an
agreement to that effect between himself and the members of the firm
as newly constituted and the creditors , and this agreement may be
either express or inferred as a fact from the course of dealing between
the creditors and the firm as newly constituted.”
IN BRIEF

• Incoming partner : 1.Debts before : not liable unless agrees to be liable

2. Debts after: liable

• Outgoing partner 1. Debts before: liable unless there is a novation

2. Debts after: not liable unless if there is a holding out
 Rolfe And Bank Of Australasia V Flower Salting & Co
• Facts : W, H, F were partners in a firm. They took two of their clerks T and S into
partnership. The newly constituted firm continued to carry on business under the old
name and no change was made to the business; even the accounts were continued
in the same way. The old firm was indebted to the respondent company to the
amount of $80,000. This debt and the interest payable in respect of it were regularly
recorded in the firm’s books of accounts to which the new partners, T and S, at all
material times had full access to. The respondent company continued to deal with the
firm as newly constituted.
• Issue : whether the new partners were liable for the debt incurred before their
admission?
• Held : the creditors had impliedly agreed to accept the new firm as debtors in the
place of old firm by dealing with it in full knowledge of the change in its membership;
and the new incoming partners T and S, by their conduct in not disputing the liabilities,
had agreed impliedly to accept joint liability with the partners of the old firm for all the
debt shown in the firm’s books of accounts.
THANK YOU FOR YOUR ATTENTION!