Relation of Partners to Third parties - Explanation and FAQs
According to Section 18 of the Indian Partnership Act (1932), a partner is an agent in the business for the purpose of growth of the firm. He is given the right to act on behalf of the firm and take necessary actions when required. He is granted permission to make moves, conduct business as usual with certain limitations being put in some situations.
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.
A partner shares the profit in a business. Similarly, 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:
Submit a business-related dispute to arbitration.
Open a bank account in his name on behalf of that business firm.
Compromise or dissolve any part of a claim by that firm.
Withdraw a case filed on behalf of that firm.
Admit any sort of liability in a suit or proceeding against that firm.
Buy an immovable property on behalf of that firm.
Make any partnership on behalf of that firm.
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.
An express authority of the partner means the authority that is given by spoken words or written.
Extension and Restriction of Partners Implied Authority
The extension and restriction of the authority of a partner depends on the clauses of the existing contract between the respective parties in the firm. However, a partner is allowed to perform actions on his own authority if he has an express authority of a partner which is either by an agreement or if the customs of the trade permit him to.
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 the 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.
Liability of a Partner for acts of the Firm
The liability of all partners of a firm together is mentioned under section 25 of the Indian Partnership act. It states the fact that every partner of the firm can be held liable jointly or individually for all the acts done by the firm while he or she is a partner of the firm.
Partners can also be held liable individually or jointly depending on the act and the decision made by the third party. This means that even if a partner had no role to play while deciding the act on behalf of the firm, he or she can be held liable to the third party in case such an act causes damage to them.
Rules to be followed when a Partner misuses or misapplies Money or Property
Section 27 recognizes the liability of the firm for a particular kind of wrong act done by a partner. The provisions are stated below.
When a partner misapplies money or property received within the apparent authority.
A firm in its course of business receives money or property that is misapplied or misused by any of its partners while it is in the custody of the firm, the firm is liable to make good of the loss suffered.
Solved Examples of the Relation of Partners to Third Parties
1. Alex is a partner in a firm of solicitors. He chose to borrow Rs. 50,000 from Vinay and executed a promissory note in the name of the firm without any authority. Are other partners liable on the note?
Ans: No. A solicitor is not allowed to draw, accept and endorse any sort of negotiable instrument, under the normal circumstances and operations of a business. Hence, According to Sections 19 and 22, Alex is solely liable for the note.
This act is considered to be done in the normal way of conducting business, in case of a banking firm.
2. Alex is a partner of a firm. He borrowed Rs. 50,000 from Vinay in excess of his authority. Alex spends this money to pay off his debts. Is the firm liable to repay the money to Vinay?
Ans: It is a trading firm because it has debts. Hence, borrowing money for the business of the firm is within the authority of Alex. An implied authority can be restricted with the help of an agreement between the partners.
Since Alex borrows the money in excess of his authority, it is assumed that his implied authority has been restricted by such an agreement.
This brings us to the question of whether Vinay is aware of this restriction imposed on Alex by the firm. If Vinay is aware of the restriction, then the firm is not liable to repay him. However, if he is unaware of the restrictions, then the liability of repayment lies with the firm.
FAQs on Relation of Partners to Third Parties
1. What is the implied authority of a partner?
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?
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?
The Indian Partnership Act does permit partners to take necessary actions in emergency circumstances as required. A partner is given the right to conduct business as usual and make key decisions that are in the positive interests of the firm. He or she can enter into contracts, purchase or sell goods or borrow money as far as they are necessary for carrying on the business of the firm. However, it has to be reasonable and has to be taken only with the motive of saving the firm from incurring a loss.
4. Is appointing a minor as a partner considered to be legal?
According to section 30 of the Indian Partnership act, someone who is recognized as a minor by law cannot be a partner of the firm. However, with the consent of all the partners in the firm, he or she can have the benefits of the partnership. Minors are considered to be unfit to be able to make effective decisions for themselves by the law.