Relation of Partners to Third Parties

Bookmark added to your notes.
View Notes
×

According to Section 18 of the Indian Partnership Act (1932), a partner is an agent in the business. He is given the right to act on behalf of the firm and take necessary actions when required.

When an individual enters into a partnership, he binds a relation not only with the co-partners but also with the third-party individuals or entities. Relation of partners to third parties is subject to various rules and regulations.

Like a partner shares the profit in a business, he also holds a number of liabilities. One of them is being an agent to all the others who co-own a business.


Partner as an Agent of the Firm

Section 18 of the Indian Partnership Act specifies the role of a partner as an agent. Since a partner is an agent of the firm, he also holds some responsibilities towards the parties involved in the business. A partner thus needs to play the role of a principal as well as the agent of a business firm.

When a partner acts in his interest in the common goal of a firm, he is playing the role of a principal. On the other hand, when he is acting as per the interest of the co-partners, he is an agent.

Relation of partners to third parties requires them to play an agent in the firm. However, a partner is never solely responsible for the transactions and dealing between the company and the third parties.


Implied Authority of a Partner

When a partner takes some action or makes a decision in accordance with the usual course of the business, he binds that firm. This authority is better known as an implied authority in partnership. But this authority ceases to exist if there is a contrary agreement present. The details of this provision are given under Section 19(2) of the Indian Partnership Act (1932).

The doctrine of implied authority in partnership as specified in the Act restricts a partner from taking certain actions. They are as follows:

  1. Submit a business-related dispute to arbitration.

  2. Open a bank account in his name on behalf of that business firm.

  3. Compromise or dissolve any part of a claim by that firm.

  4. Withdraw a case filed on behalf of that firm.

  5. Admit any sort of liability in a suit or proceeding against that firm.

  6. Buy an immovable property on behalf of that firm.

  7. Make any partnership on behalf of that firm.

  8. Transfer any immovable property which belongs to that partnership firm.

Section 22 of the Partnership Act also mentions that any act was done by a partner with an intention to bind the firm must be done in the name of that firm. A partner’s role as an implied agency in partnership depends on the nature, extent, and intent of a business firm.

As per Section 20 of the Partnership Act, partners in a business undertaking can make a contract to extend or dissolve the implied authority of any partner. This would affect the relation of partners to third parties only when that party is aware of the restrictions.


A Partner’s Authority in an Emergency

Section 21 of the Indian Partnership Act (1932) states that in case of any emergency, every partner has the authority of taking necessary actions to prevent the firm from bearing losses. It might include making payments or incurring liabilities. Any such act has to meet these following requirements:

  • It was a situation of absolute emergency.

  • The particular partner acted according to the need of the situation.

  • The intention behind that partner's action was only to protect the business from loss.

  • That act was reasonable and just under those circumstances.

In an emergency act, relations of a partner to third parties and his dealings with them is also under scrutiny. If the action has been taken without prior notice or permission, it will be considered only if ratified by other partners.


Admissions Made by a Partner

In the Indian Partnership Act, Section 23 talks about the admission or representation made by an existing partner. If it concerns the affairs of that firm and has been made in the normal course of business, it can be taken as evidence against the firm. This is because a partner is an agent of the firm as well as works for its business goals.

FAQ (Frequently Asked Questions)

1. What is the Implied Authority of a Partner?

Ans. As an agent of the firm, a partner has to act in the usual course of business. In this case, the act of the partners binds the firm. But if a contrary agreement is made, the implied authority of a partner ceases to exist. Section 19(2) details the actions which a partner is restricted from doing on behalf of the firm even under implied authority.

2. What are the Relations of Partners to Third Parties?

Ans. Relation of a business partner with respect to third parties has to abide by several rules and regulations. Section 18 to 22 of the Indian Partnership Act of 1932 puts up the norms for the relations of partners to third parties.

3. What is the Authority of a Partner in an Emergency Situation?

Ans. The Indian Partnership Act does permit partners to take necessary actions in emergency circumstances as required. However, it has to be reasonable and has to be taken only with the motive of saving the firm from incurring a loss.