Relation of Partners to Third Parties: Authority of Partners, Mutual Agency

In this article, we will look at the various rules that govern the relation of partners in a firm to a third party. Sections 18 to 22 of the Indian Partnership Act, 1932, offer details of different scenarios under which partners can have different relations with a third party.

A Partner is an Agent of the Firm (Section 18)

A partnership is a relationship between partners who agree to share the profits of the business. The business can be carried on by all of them or any of them acting for all. This definition suggests that a partner can be an agent of the others.

Section 18 specifies that a partner is an agent of the firm for the purpose of business of the firm. This is actually one of the essential elements of a partnership.

Hence, a partner embraces the character of both, the principal and the agent. Therefore, if he acts for himself and in his own interest in the common concern of the partnership, then he is acting as a principal. On the other hand, if he acts for and in the interest of his partners, then he is acting as an agent.

It is important to note that a partner is an agent only or the purpose of business of the firm. He is not an agent for all transactions and dealings between the partners themselves.

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Implied Authority of a Partner (Section 19)

If a partner does an act in the usual course of business of the firm, then his act binds the firm. This authority of a partner to bind the firm is Implied Authority. Unless a contrary agreement exists, implied authority does not empower a partner to (Section 19 – subsection 2 of the Indian Partnership Act, 1932):

Submit a dispute, relating to the business of the firm, to arbitration
Open a bank account in his name, on behalf of the firm
Compromise or relinquish, full or part of a claim by the firm
Withdraw a suit or proceedings filed on behalf of the firm
Admit any liability in a suit or proceedings against the firm
Acquire an immovable property on behalf of the firm
Transfer an immovable property belonging to the firm
Enter into a partnership on behalf of the firm

Section 22 of the Indian Partnership Act, 1932, adds that the act which was done by the partner to bind the firm must be done in the name of the firm or in any other manner which implies an intention to bind the firm.

While the implied authority depends on the nature of the business of the firm, a partnership of a general commercial nature may allow the partner to:

Pledge or sell the partnership property
Purchase goods on behalf of the partnership
Borrow money, contract and pay debts on account of the partnership
Draw, make, sign, endorse, transfer, negotiate and procure negotiable papers in the name and on account of the partnership.

According to Section 20 of the Indian Partnership Act, 1932, the partners of a firm can make a contract to extend or restrict the implied authority of a partner.

These restrictions or extensions apply to a third party only when the third party is aware of the restrictions or does not know that he is dealing with a partner of the firm.

Partner’s Authority in an Emergency (Section 21)

As per Section 21 of the Indian Partnership Act, 1932, if there is an emergency, then every partner has the authority to do all such acts that a person of ordinary prudence would do to protect the firm from a loss. Such acts bind the firm.

Learn different kinds of partnerships here.

Solved Examples on Relation of Partners to Third Parties

Q: Peter is a partner in a firm of solicitors. He borrows Rs. 50,000 from John and executes a promissory note in the name of the firm without any authority. Are other partners liable on the note?

Answer: No. Under the usual course of business, a solicitor does not draw, accept, or endorse negotiable instruments. Hence, According to Sections 19 and 22, Peter is solely liable for the note.

As a side note, if the firm was a banking firm, then this act would have been considered to be done in the usual course of business.

Q: Peter is a partner of a firm. He borrows Rs. 50,000 from John in excess of his authority. Then, he uses this money to pay off the debts of the firm. Is the firm liable to repay the money to John?

Answer: The fact that the firm has debts implies that it is a trading firm. Hence, borrowing money for the business of the firm is within Peter’s authority. Now, an implied authority can be restricted by an agreement between partners (Section 20).

Since Peter borrows the money in excess of his authority, we can assume that his implied authority has been restricted by such an agreement.

This brings us to the question of whether John is aware of this restriction imposed on Peter by the firm. If John is aware of the restriction, then the firm is not liable to repay him. However, if he is unaware of the same, then the liability of repayment lies with the firm.

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