Module 4: Relations of

Partners to Third Parties

Presented by:
Varnika Taya
 LIABILITY OF PARTNER FOR ACTS OF THE
FIRM
❑ Section 25.
❑ Indian law – partners have joint and several liability for the acts of the firm
❑ English law
▪ Partnership Act, 1890 – (1) partners have joint liability in respect of firm’s contracts;
and, (2) partners have joint and several liability for firm’s wrongs
▪ Partnership Act, 1890 r/w Civil Liability (Contribution) Act, 1978 – has the virtual
effect that partners have joint and several liability in respect of firm’s contracts
❑ Liability of the partner incurs only for those acts of the firm which are done when
they are partners in that firm (exception – Section 28 – holding out)
 DOCTRINE OF IMPLIED AUTHORITY
❑ SECTION 2(A) – ACT OF A FIRM

❑ SECTION 18 – PARTNER TO BE AN AGENT OF THE FIRM

▪ A partner is an agent as well as a principal. He is accepted as an agent of the firm only for the purpose of
the business of the firm.
❑ SECTION 19 – SCOPE OF IMPLIED AUTHORITY

▪ Scope of authority is linked with the nature of the business and the way it is carried on.

▪ Whether a given act was done by a partner in carrying on the business in the usual way is a question to “be
determined by the nature of the business, and by the practices of persons engaged in it”.
▪ Higgins v. Beaucamp, (1914) 3 KB 1192: Herein, B and M were carrying on the business of
cinematographic theatre proprietors in partnership. B was sleeping and M managing partner. Their deed
provided that no partner would borrow money except with the consent of the other or in the usual course of
business. M borrowed two sums of money from the plaintiff H upon the representation that the money was
to be used for the partnership business. But he misappropriated it. The lender sued the other partner. He
was held not liable. It was observed that there was not actual authority to borrow for the business. It had,
therefore, to be proved that an authority was implied from the nature of the business. Since the court found
that it was a non-trading business, there was no implied authority either.
▪ Joint Venture – Section 19(2)(h) – Entering into a partnership is different than engagement of the
firm in a single transaction with another person with a view to sharing its profits. (Mann v. D’arcy,
(1968) 1 WLR 893: Herein, the defendants were doing the business of buying and selling potatoes.
The active partner entered into an arrangement with the plaintiff to enter into a joint venture in
respect of a part of cargo of potatoes for sharing the profits of the venture. This was held to fall
within the sphere of his authority. It was observed, that, “the arrangement was merely one mode of
buying and selling what he was authorised to buy and sell on behalf of the partnership”.)
▪ Legal Proceedings – Section 19(2)(a) – Although a partner is not impliedly empowered to submit a
dispute relating to the business of the firm to arbitration; it is within the scope of the partner’s
authority to defend an action brought against the firm and to engage a lawyer for the purpose.
(Tomlinson v. Broadsmith, (1896) 1 QB 386 (CA): Herein, the managing partner of a firm, having
purchased goods on credit, the firm was sued. He engaged a solicitor and defended the action but
in vain. The other partner knew nothing of the transaction or the action until the sheriff knocked his
door with a decree. Even so he was held liable. Describing the partner’s action as nothing but an
ordinary incidence of business, it was observed by the court that, “it is an idle thing to say in one
breath that the managing partner was to carry on the business and to be a responsible manager,
and yet that he was not to move in such a matter as this, in which the welfare of the partnership was
concerned”.)
❑ SECTION 19 AND 20 – RESTRICTIONS ON IMPLIED AUTHORITY
▪ When a partner is prohibited from doing an act which would otherwise be within the scope of his
implied authority, it is said that the implied authority of the partner has been restricted.
▪ Such restrictions are of two kinds, namely, statutory restrictions (Section 19(2)), and those that may
be imposed by the partnership agreement (Section 20)
▪ Statutory restrictions as under Section 19 (2) are effective against all the world whether a particular
person contracting with the firm has knowledge of them or not.
▪ Restrictions which may be imposed by partnership agreement (as covered u/s 20) provide that if the
act in question is within the scope of the partner’s implied authority, the firm is bound unless it can
be shown:
a) that the person contracting with the partner had knowledge of the restriction, or

b) that he did not know or believe the partner to be a partner.

▪ Mercantile Credit Co. Ltd. v. Garod (1962) 3 All ER 1103: Herein, P and G were
partners in a business of letting lock-up garages and repairing cars. G was a sleeping
partner. A clause in the partnership deed prohibited partners from buying and selling
cars on behalf of the firm. P, the acting partner, sold a car to which the firm had no
title and obtained £700. When the buyer found that the seller had no title to sell, he
claimed £700 from G, the sleeping partner. G was held liable. Garage owners usually
sell second-hand cars. The act was, therefore, within the scope of the implied
authority. The plaintiff did not know of any restriction in the deed and he did know that
he was dealing with a partner within the scope of his usual authority.
▪ Difference between the statutory restrictions contained in Section 19(2) and those
imposed by the partnership deed – while the former are binding upon every person
contracting with the firm whether he has knowledge of them or not, the latter are not
effective against a party who has no knowledge of them.
❑ AUTHORITY IN EMERGENCY – SECTION 21
❑ MODE OF EXERCISING AUTHORITY – SECTION 22
▪ The third party must know of the representative character of the partner as an agent of the firm. The
partner acting for the firm must expressly or impliedly let the third party know that he acts for the
firm.
▪ Where the partner fails to do this he will incur personal liability on the contract and the firm may not
be liable.
▪ Sitaram Krishna v. Chimandas Fatehchand, ILR (1928) 52 Bom 640: Herein, a bill of exchange
signed by one of the partners in the following form:
(Sd.) “G.V.A., Managing Proprietor, G. & B. Friends, Bombay”
In a suit brought against the firm for the concerned bill of exchange, it was held that this mode of
signature did not express or implies an intention to bind the firm. The words following the signature
only revealed the status of the person signing and not his intention to act for the firm.
▪ R.S. Rajendran v. Shankar Sundaram, (2008) 2 SCC 724: Herein, an advance of fifty lakh rupees
was arranged to be taken from the plaintiff by a person who was a partner in the firm. The cheque
was made in the name of the firm and the cheque was executed by the partners. The Supreme
Court held that prima facie, in such a case, the liability of the firm could not be ignored. The plaintiff
could enforce the claim against the firm and also against its partners.
❑ ADMISSIONS BY PARTNER – SECTION 23
▪ Representations or misrepresentations made by a partner in the course of the business of the firm
are binding upon the firm. But representations by a partner as to the scope of his implied authority
do not bind the firm because that authority depends upon the usual manner of carrying on the
business and not upon a partner’s representations. If this were not so, partnership firms would be
at the mercy of unscrupulous partners. (Agace, ex parte, (1792) 30 ER 145: Herein, a partner
gave partnership bills in payment of his personal debts. On being asked by the other party whether
his co-partners had agreed to this, he falsely told that they had. Herein, thus, it was held that the
bills could not be enforced against the firm.)
❑ EFFECT OF NOTICE TO PARTNER – SECTION 24

Section 24 lists down the conditions to be fulfilled for a notice to a partner to effect as a notice to firm.
1) Notice – notice herein should be actual and not constructive in nature. (The equitable doctrine of
constructive notice that a person is deemed to know that which he might have discovered on inquiry is
not to be imported into commercial transactions: Scamell (Ed), Lindley on The Law of Partnership
(12th Edn 1962) 172)
2) The notice must be given to a partner who habitually acts in the business of the firm, that is, to an
acting partner as opposed to a dormant or sleeping partner.
3) The partner receiving notice should not have withheld it from the firm either by his own fraud or in
conspiracy with the third party.
▪ Bignold v. Waterhouse, (1813) 1 M&S 255: Herein, a firm of stage coach proprietors carried certain
parcels for the plaintiff free of expense but subject to the condition that the firm would not be
accountable for parcels above the value of £5 unless paid for. Parcels above this value were often
carried by the working partner for a consideration personal to himself but never brought to the notice of
the other partners. Accordingly they were held not liable for the loss of such packages as notice of their
value was deliberately kept from them.
 LIABILITY FOR TORTS AND OTHER WRONGS –
SECTION 26
Wrongful act in ordinary course of business
 Hamlyn v. John Houston & Co, (1903) 1 KB 81: Herein, the plaintiff and the defendant were two grain
merchants. The defendant firm consisted of one Houston and one Strong. The conduct of business was
left to Houston. He bribed a clerk of the plaintiff and induced him to give secret information about the
plaintiff’s customers and prices. Consequently the plaintiff lost business to the tune of £750. He sued the
defendant firm. The firm was held liable. It was usual for persons engaged in that kind of business to
obtain secret information about the business of the competitors. Thus it was clearly within the authority of
the acting partner to obtain such information. The Court observed, “the information could be obtained by
lawful or unlawful means and the partnership is liable if it is obtained by unlawful means. It must now be
conceded that a tort, or even a crime, may not be outside the scope of the authority of a partner or
agent”.
 Hurruck Chand v. Gobind Lal Khetry, (1906) 12 CWN 1053: Herein, the plaintiff and the defendant
were firms of merchants dealing in piece goods. One Baij Nath was the active partner of the defendant
firm. The plaintiff sent a cartload of dhoties and shirtings to the Howrah railway station to be consigned to
their customers, but they were stolen en route to the station. The goods were subsequently recovered
from the possession of Baij Nath who was dealing with them in the name of the firm. The other partner
knew nothing whatever about the theft. The firm was held liable. It was within the authority of Baij Nath to
sell piece goods for the firm. The goods that he sold belonged to the plaintiff. That was conversion of the
plaintiff’s property for which the firm was liable.
 Where the misconduct of a partner has nothing to do with the business of the firm or
is his private affair, the firm is not liable. (Tendring Hundred Waterworks Co v.
Jones, (1903) 2 Ch 615: Herein, J & G were two partners in a firm. G was
appointed, with the approval of the firm, as a secretary to the plaintiff company. The
company purchased property and for its own convenience had it transferred to G in
his own name and also left the title deed with G. G fraudulently mortgaged the
property for his personal debt. The other partner was held not liable for this fraud. If
he had misconducted himself as secretary and caused loss to the company, the firm
would have been liable. But it was no part of a secretary’s duties to accept a transfer
of property in his name. The company had by its own conduct enabled the secretary
to commit the fraud by placing him in a position which was not in the scope of
partnership business for him to accept.)
LIABILITY FOR MISAPPROPRIATION – SECTION 27
 Apparent authority = ordinary course of business; because, they both amount to the
same thing as a partner’s apparent authority also depends upon the ordinary course
of the firm’s business.
 Rhodes v. Moules, (1895) 1 Ch 236 (CA): Herein, the plaintiff applied to R, a
member of a firm of solicitors, requesting him to raise a loan on the mortgage of his
freehold estate. R obtained the loan, but falsely told the plaintiff that lender required
some additional security. The plaintiff accordingly deposited with R certain share
warrants payable to bearer. R promptly sold the warrants, misappropriated the
proceeds and absconded. His co-partners were held liable for the plaintiff’s loss.
According to Lord Herschell, it was “certainly within the scope of solicitor’s business
to receive securities for loan, whatever be their nature”, and Lindley LJ added, “the
only conclusion at which I can arrive is that the plaintiff’s certificates came into R’s
hands when acting within the scope of his apparent authority”.
 HOLDING OUT – SECTION 28
1) Representation
▪ Representation may be express or implied, written or oral.
▪ Express representation – Kirkwood v. Cheetham and Smith, (1862) 2 F&F 798: Herein, a butter
dealer appointed Smith as his servant to take a warehouse and start business under the name of
Smith & Co. Certain goods were supplied to the firm. Regarding liability towards the goods, it was
held that though not partners, the defendants were jointly liable by way of Smith holding himself out
as partner, and Cheetham as the real principal.
▪ Representation by conduct – Colonel A.R. Porter v. W. Incell, (1905) 10 CWN 313: Herein, the
defendant had given loan to a person establishing a cattle farm. The defendant took such deep
interest in the business that he used his personal influence to obtain lease of premises for the farm
and was constantly present there receiving parties and their demands. The plaintiffs supplied
building material to the firm under the impression that the defendant was a partner. He was
accordingly held liable as a partner by holding out.
▪ Holding out may also arise where a person “knowingly permits” or “suffers” himself to be
represented as a partner. Tower Cabinet Co. v. Ingram, (1949) 2 KB 397: Herein, C and I carried
on business as household furnishers. I retired and C continued the business under the same name.
Subsequently to the change, the plaintiff company supplied to the firm six suites of furniture, the
price for which was never paid. Finding that I’s name appeared on the papers of the firm on which
the contract was concluded, they sought to enforce the judgment against him. I had not permitted
his name to remain on the papers, but he had not destroyed them before leaving the firm. Holding
that he was not liable, Lynskey J laid down that the plaintiffs must prove that I knowingly suffered
himself to be represented as a partner. The only evidence of that was that the order was given by C
on a notepaper which contained I’s name. But that representation was made by C without I’s
knowledge and without his authority. That being the finding of fact it was impossible to say that I
knowingly suffered himself to be so represented.
▪ Although bare knowledge that his name is being used may not make a person liable by holding out;
knowledge may in time become evidence of consent by acquiescence.
2) Knowledge of representation
▪ The person seeking to hold another liable by holding out or estoppel must show that he had
knowledge of the representation and acted on it.
 APPLICATION OF DOCTRINE OF HOLDING OUT
 Retirement of Partners – When a partner retires and a public notice of retirement is not given, the
retired partner remains liable by holding out to those customers of the firm who have given credit
without knowledge of the retirement. The customer can sue either the old firm or the new firm as
constituted after retirement. But he cannot sue both. He must make his election and an election once
made is final and binding upon him. (Scarf v. Jardine, (1882) LR 7 AC 345 (HL): Herein, a firm
consisted of two partners Scarf and Rodgers. Scarf retired and Beach joined the firm in his place. The
business was carried on under the same name and no notice of the change was given to the
customers of the firm. Jardine was an old supplier to the firm. Goods were ordered of him and he
supplied them knowing nothing of the change. The firm failed to pay. When he brought his action for
the price, he came to know of the change and preferred to sue the new firm. The firm went bankrupt.
He then sued the retired partner. It was held that he had lost his right to proceed against the retired
partner. He could have sued the old partner because those who have been dealing with the firm
before any change took place are entitled to assume that no change has taken place till they have
notice to the contrary. He could also have sued the new partner because the goods were supplied at
a time when he was a partner. But he could not sue both.)
 Deceased Partner – The estate of a deceased partner is not liable for any act of the firm done after
his death even if the business is continued by the surviving partners in the same style and place and
even if his name appears in the name and affairs of the firm. Death is a notice by itself. (Section 28(2)
and Section 35)
 Insolvent Partner – A person ceases to be a partner from the date of his insolvency
and his estate is no more liable for any act of the firm done after his insolvency
whether notice has been given or not. (Section 34)
 Dormant Partner – A dormant or sleeping partner means a partner whose
existence as partner is not reflected by the name of the firm or otherwise. He has
never taken part in the conduct of the business as partner and, therefore, he is not
known to the customers of the firm. As long as he remains a partner his liability for
the acts of the firm is the same as that of any acting partner. But when he retires,
public notice is not a requisite to terminate his liability. His presence in the firm is not
known to the public and his exit need not be publicly announced. Where his
presence in the firm was known to some customers, notice of his retirement must be
given at least to them. (Section 28 and proviso to 32(3))
 TRANSFEREE OF PARTNER’S INTEREST –
SECTION 29
 Transferee does not become partner by itself
 The provision gives transferee 2 rights –
 during the continuance of the firm he is entitled to receive the share of profits of the
transferring partner. But he has to accept the accounts of profits as given by the
partners. He cannot inspect the accounts; and
 on the dissolution of the firm or when the transferring partner ceases to be a partner,
he is entitled to receive the transferring partner’s share in the assets of the firm. And
for the purpose of ascertaining that share he is entitled to an account as from the
date of the dissolution.
 MINOR AS A PARTNER – SECTION 30
▪ Section 30.

▪ Section 30(5) shall not be applicable to a minor partner who was not a partner at the time of his attaining the
majority. (State of Kerala & Ors. v. Laxmi Vasanth & Ors., Supreme Court Civil Appeal Nos. of 2022: Herein,
the respondents Lakshmi Vasanth and J. Rajmohan Pillai were inducted as a partners of the partnership firm,
namely, M/s. Malabar Cashew Nuts and Allied Products, when they were minors. The partnership firm was later on
reconstituted on 1976 and the aforesaid two minor partners were removed as partner. Thereafter, Lakshmi Vasanth
attained the majority in the year 1987 and J. Rajmohan Pillai attained the majority in the year 1984. For
ascertainment of tax liability of the firm for the period between 1970-71 to 1995-96, it was contended that as after
attaining the majority, the respondents did not give any notice as required under Section 30(5), they are deemed to
be the partners and therefore, their liability to pay the dues of the partnership firm continued. Deciding in favour of
the repsondents, it was held by the Court that, Section 30(5) shall not be applicable at all. Section 30(5) shall be
applicable only in a case where a minor was inducted as a partner and thereafter at the time of attaining the
majority he continued as a partner in that case such a partner who has been continued is required to give notice
within 6 months as provided under Section 30(5). If such a person who has been continued as a partner at the time
of attaining the majority does not give notice as per Section 30(5), in that case, he is deemed to have been and/or
he shall be continued or treated to have been continued as a partner and the consequences and the liability as per