PROJECT

Contract Law-2
Partnership is nothing but extension of Agency

SUBMITTED TO

Professor Nishtha Agrawal

United World School of Law (UWSL),
Karnavati University
(Faculty-Contract Law -2 )

SUBMITTED BY

Name: - Malvisha Jadeja

Roll No: -27
Semester: -3
Section: -B

United World School of Law ,

Karnavati University.
 CERTIFICATE OF DECLARATION

I hereby declare that the project work entitled “Partnership is

nothing but extension of Agency” submitted to Unitedworld school
of law, Gandhinagar, is record of an original work done by me under
the guidance of Professor, Faculty Member, Unitedworld school of
law, Gandhinagar.

Name: Malvisha Jadeja

Roll no.: 27
Semester: 3
Section: B
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my Professor

Nishtha Agarwal who gave me the opportunity to this project on the
topic of “Partnership is nothing but extension of Agency”, which
also helped me in doing a lot of research and I came to know about so
many new things. I am really thankful to him. Secondly, I would also
like to thank my parents, friends, who helped me a lot and have given
me valuable suggestion pertaining to the topic and in completing this
project in the given time frame.
THANKING EVERYONE
 Research Methodology

Objective:
To know is partnership extention of agency and understand the concept of
partnership

Hypothesis:
I have examined the facts that if partnership is extention of agency

Research Question:
Is partnership extention of agency?
What is partnership?
Who can enter into partnership?
What is essential for partnership?
 Introduction

One of the forms in which business can be carried on is ‘partnership’, where

two or more persons join together to form the partnership and run the business.
The Indian Partnership Act, 1932 is an act enacted by the Parliament of India to
regulate partnership firms in India. Since public at large would be dealing with
the partnership as customers, suppliers, creditors, lenders, employees or any
other capacity, it is also very important for them to know the legal consequences
of their transactions and other actions in relation with the partnership. A
partnership is mean of bringing together the person who can contribute capital
skill for expansion of business.
THE INDIAN PARTNERSHIP ACT, 1932:

The Indian Partnership Act, 1932 received the assent of the Governor-General
on 8 April, 1932 and came into force on 1 October 1932, except section 69
which came into force on the 1st Day of October, 1933. Before the enactment of
this act, partnerships were governed by the provisions of the Indian Contract
Act (Chapter IX - sections 239 to 266). It was derived from English Partnership
Act, 1890. The act is administered through the Ministry of Corporate Affairs.
The act is not applicable to Limited Liability Partnerships, since they are
governed by the Limited liability Partnership Act, 2008.

Features of the Act1:

Act complimentary to Contract Act- The Indian Partnership Act is

complimentary to Contract Act. Basic provisions of Contract Act apply to
contract of partnership also. Basic requirements of contract i.e. legally
enforceable agreement, mutual consent, parties competent to contract; free
consent, lawful object, consideration etc. apply to partnership contract also.1

Partnership Contract is a ‘Concurrent subject’ - ‘Contract, including partnership

contract’ is a ‘concurrent subject, covered in Entry 7 of List III (Seventh
Schedule to Constitution). Indian Partnership Act is a Central Act, but State
Government can also pass legislation on this issue. Though Partnership Act is a
Central Act, it is administered by State Governments, i.e. work of registration of
firms and related matters are looked after by each State Government. The Act is
not applicable to Jammu and Kashmir.

Partnership Firm is not a legal entity - It may be surprising but true that a
Partnership Firm is not a legal entity. Under partnership law, a partnership firm

1
1 S.D. Singh & J.P.Gupta, Law of Partnerships in India, Orient Law House, Third Revised Edition,(1988), at
p.8.
is not a legal entity, but only consists of individual partners for the time being. It
is not a distinct legal entity apart from the partners constituting it - Malabar
Fisheries Co. v.

Firm legal entity for the purpose of Taxation - For tax law, income-tax as well
as sales tax, partnership firm is a legal entity - State of Punjab v. Jullender
Vegetables Syndicate- v. A W Figgies4 - v. G Parthasarthy Naidu Though a
partnership firm is not a juristic person, Civil Procedure Code enables the
partners of a partnership firm to sue or to be sued in the name of the firm. -
Ashok Transport Agency v. Awadhesh Kumar
ESENTIALS OF PARTNERSHIP:2

1. Agreement.

2. Agreement between two or more persons

3. Business.

4. Sharing of Profits.

5. Business carried on by all or any of them acting for all. (Mutual Agency)

1. Agreement:

There has to be an agreement between two or more people to enter into

partnership. The agreement is the source of the partnership. It is not necessary
that the agreement be formal or written. An agreement can be express or
implied. Further, such agreement must follow all the requirements of a valid
contract given by Indian Contract Act 1872. This includes the parties must be
competent to contract and the object of the agreement should be legal as Section
5 of IPA 1932 provides that the relation of partnership arises from contract and
not from status. Thus, if there is no specific contract, there can be no
partnership.

The Supreme Court, in Tarsem Singh v Sukhminder Singh3, has held that it is
not necessary under the law that every contract must be in writing. There can be
an equally binding contract between the parties on the basis of oral agreement,
unless there is a law which requires the agreement to be in writing.

2
Justice K. Sukumaran, Mulla The Indian Partnership Act, Pollock & Mulla, Lexis Nexis Butterworths, Sixth
Edition.
3
AIR 1998 SC 1400
2. Agreement between two or more persons:
The term ‘person’ as used in Sec.4 does not include a firm. This is because a
firm is not a separate legal entity. As such two partnership firms cannot enter
into partnership, though all the partners of the two firms may form a partnership
out of their separate firms provided their number does not exceed the statutory
limit.

In agreement associated between two or more persons, the number of partners

in a firm shall not exceed 20 and a partnership having more than 20 persons is
illegal. If the partnership is between the Karta and member of Hindu undivided
family the members of the joint Hindu family will not be taken into account.

A company is a ‘person’ and being an entity distinct from its members; enter
into a contract of partnership if it is authorized by its Memorandum of
Association.

The following can enter into a partnership:

Individual

Firm

Hindu undivided family

Company

Trustees

Individual: An individual, who is competent to contract, can become a partner

in the partnership firm. If there are more than two partners in a firm, an
individual can be a partner in his individual capacity as well as in a
representative capacity as Karta of the Hindu undivided family.
Firm:
A partnership firm is not a person and therefore a firm cannot enter into
partnership with any firm or individual. But a partner of the partnership firm can
enter into partnership with other persons and he can share the profits of the said
firm with his other co-partners of the parent firm.

Hindu undivided family:

A Karta of the Hindu undivided family can become a partner in a partnership in
his individual capacity, provided the member has contributed his self-acquired
or personal skill and labour.

Company:
A company is a juristic person and therefore can become a partner in a
partnership firm, if it is authorized to do so by its objects.

Trustees:
Trustees of private religious trust, family trust and trustees of Hindu mutts or
other religious endowments are juristic persons and can therefore enter into
partnership, unless their constitution or objects forbid.

3. Business:
They must intend to start or do a business. A business is a very wide term and
includes any trade, occupation, or profession. Business may not be of long
duration or permanent and even a single activity may be considered a business.
Thus, if two persons are not partners, they can engage in a transaction with an
intention to share profits and can become partners in respect of that transaction.

For example, if two advocates are appointed to jointly plead a case and if they
agree to divide the profits, they are partners in respect to that case.

Section 8 of the Act also mentions that a person may become partner with
another in particular adventures of undertaking. It is however necessary that a
business exists. If a business is simply contemplated and has not been started,
the partnership is not considered to be in existence.
4. Sharing of profits:
Normally, an activity is done in partnership with a goal to make profits. Thus,
for a valid partnership to exist, the partners must agree to share the profits
according to their investment. Here, profits include losses as well. The partners
may agree to share profits out of partnership business, but not share the losses.
Sharing of losses is not necessary to constitute the partnership. The partners
may agree to share the profits of the business in any way they like.

The honorable apex Court of the nation has reiterated the provision in Section 6
of the Act in Girdharbhai v. Saiyed Mohmad Mirasaheb Kadri:4

that in determining whether a group of persons is a firm or not, the real intention
of the parties has to be taken into consideration. The Supreme Court had laid
down the elements to determine a partnership as

(a) there must be an agreement entered into by all parties concerned; (b) the
agreement so entered into must be to share profits of a business; (c) the business
must be carried on by all or any one for all.

5. Mutual Agency:
The present definition replaces Section 239, Indian Contract Act which defined
‘Partnership’ as under:

‘Partnership is the relation which subsists between persons who have agreed to
combine their property, labour or skill in some business, and to share the profits
thereof between them.’

The present definition is wider than the one contained in the Indian Contract
Act in so far as it includes the important element of ‘mutual agency‘, which was
absent in the old definition.

4
AIR 1987 SC 1782
According to Pollock, ‘Partnership is the relation which subsists between
persons who have agreed to share the profits of a business carried on by all or
any way of them on behalf of all of them.’

The firm must be managed by the partners and thus when any partner acts; he
acts on behalf of the firm and thus on behalf of other partners. Therefore, a
partner is considered an agent of others. In absence of such mutual right of
agency, a partnership cannot exist.

For example: An author receiving a royalty from publishers is not a partner

because there is no mutual agency between them.
 THE LAW OF PARTNERSHIP IS AN EXTENSION OF THE
LAW OF AGENCY:

Firstly it is important to discuss something about Agency:

Definition: Sec 182 of Indian Contract Act, 1872 defines an ‘Agent’ as “a

person employed to do any act for another or to represent another in dealings
with third person”. The person for whom such act is done or who is represented
is called the “principal”. The relationship between the agent and the principal is
called “agency”.

The common law principle in operation is usually represented in the Latin

phrase, “qui facit per alium, facit per se , i.e. the one who acts through another,
acts in his or her own interests” and it is a parallel concept to vicarious liability
and strict liability in which one person is held liable in Criminal law or Tort for
the acts or omissions of another.

Principles of Agency: Contracts of agency are based on two important

principles, namely:

a) Whatever a person can do personally shall also be allowed to be done

through an agent except in case of contracts involving personal services such

as painting, marriage, singing, etc.

b) He who does not act through a duly authorized agent does it by himself, i.e.,

the act of the agent are considered the acts of the principal (Sec. 226).

Essential features of agency: Agency has certain essential features. They are as
follows:

(i) Agency implies that one person (i.e. an agent) brings two other persons (i.e. a
principal and a third person) into contractual relationship - That means an agent
is a connecting link between the principal and the third person.
(ii) An agent is not mere a connecting link between the principal and the third
party. He also creates a legal relationship between the principal and the third
party - That is he makes the principal answerable to the third party for his

acts and also entitles the principal to all the benefits accruing from his acts.

(iii)An agency can be established to do any act which the principal could do
lawfully - That means an agency can be established only for lawful acts. If an
agency is established for an unlawful act it cannot be enforced by law.

(iv)Agency can be created only for those acts which can be delegated by a
person to another - That means agency cannot be created for acts which must be
done by a person himself and cannot be delegated to an agent say painting,
marrying, singing.

(v) The agency relationship may be established by a contract between the

principal and the agent which may be written or oral, or may be established by
implications, as in the case of husband and wife, master and servant etc.

(vi)Though a valid contract requires that both the contracting parties must be
competent to contract, for a contract of agency, it is enough if only the principal
is competent to contract - The agent need not be competent to contract. In other
words an agent may be incompetent to contract, say a minor, lunatic, idiot etc.

(vii) There should be the intention on the part of the agent to act on behalf of the
principal - As such, if a person intends to act on behalf of another an agency
arises even if the contract between the parties provides that there is no such
relationship. On the other hand if a person intends to act on his own behalf and
not on behalf of another there cannot arise any agency, even if the person
contends that he is an agent.

(viii) No consideration is necessary to create an agency - The fact that the

principal has agreed to be represented by the agent is a sufficient detriment to
the principal to support the contract the contract of agency. Though no
consideration is necessary to support a contract of agency, an agent may be paid
for. That means an agent may be paid for his services.

(ix) An agent is appointed with specific instructions and is authorized to act

within the scope of the instructions (i.e. the authority) - As such the agents
within the scope of his authority are regarded as the acts of the principal and
such acts bind the principal as if the principal has done them himself.

Who may employee an agent- Any person who is of the age of majority
according to the law to which he is subject, and who is of sound mind, may
employee an agent (Sec. 183). Thus any person competent to contract can
appoint an agent.

Who may be an agent- As between the principal and third person any person
can become an agent, but no person who is not of the age of majority and of
sound mind can become an agent, so as to be responsible to his principal
according to the provisions in that behalf herein contained (Sec. 184).

The concept of “agency” has been thus explained by RAMSWAMI J. of the

Madras High Court in Krishna v Ganapathi5; ―In the legal phraseology, every
person who acts for another is not an agent. A domestic servant renders to his
master a personal service; a person may till another’s field or tend his flocks or
work in his shop or mine; one may for another in aiding in the performance of
his legal or contractual obligations of third persons.... In none of these capacities
he is an agent and he is not acting for another in dealings with third persons....
Representative character and derivative authority may briefly be said to be the
distinguishing feature of an agent.

5
AIR 1955 SC Mad 648.
 In Shivraj Reddy & Bros v S. Raghu Raj Reddy6 it was held that “A person can
become a partner in a firm, which is the position of an agent, without making
any capital contribution.”

Now we will discuss that how Partnership is an extension of Agency: As

mentioned above there are five essential characteristics of partnership. An
association of two or more persons entering into an agreement to share profits
may not necessarily determine partnership because such an agreement may not
be able to carry on business and may be formed for charitable or social objects.
Similarly mere sharing of profits may exist between the joint owners of the
property and therefore this may also not determine the existence of partnership.
Even a mere statement that the parties are to be partners will not necessarily
constitute them as partners in law. So also a person who holds out himself to be
a partner is not a partner in law though he may be liable to third parties.

Section 6 of the Act provides for the Mode of Determining Existence of

Partnership which reads as:

“In determining whether a group of persons is or is not a firm, or whether a

person is or is not a partner in a firm, regard shall be had to the real relation
between the parties, as shown by all relevant facts taken together.

Explanation I: The sharing of profits or of gross returns arising from property

by persons holding a joint or common interest in that property does not of itself
make such persons partners.

Explanation II : The receipt by a person of a share of the profits of a business,

or of a payment contingent upon the earning of profits or varying with the
profits earned by a business, does not itself make him a partner with the persons
carrying on the business;

6
AIR 2002 NOC 120 (AP)
and, in particular, the receipt of such share or payment -

(a) by a lender of money to persons engaged or about to engage in any business

(b) by a servant or agent as remuneration,

(c) by the widow or child of a deceased partner, as annuity, or

(d) by a previous owner or part-owner of the business, as consideration for the

sale of the goodwill or share thereof, does not of itself make the receiver a
partner with the persons carrying on the business. “

Thus, the intentions of the partners will have to be decided with reference to the
terms of the agreement and all the surrounding circumstances including
evidence as to the interfacing or interlocking of management finance and other
incidents of the respective businesses.

The members of a Hindu Undivided family carrying on family business are not
partners, because a male child of a Hindu acquires an interest in such business
by birth apart from any agreement to that fact. He is not a partner but a joint
owner. Joint ownership is a family quasi-partnership created by the operation of
law and is not a partnership arising out of a contract. Similarly, a Burmese
Buddhist husband and wife carrying on business are not partners.

The true test for determining the existence of partnership is Agency and
Authority. It is the reaction of agency which distinguishes a partnership from
co- ownerships. It was held that in cases where losses as well as profits are
shared, the presumption about the existence of partnership still becomes
stronger, though not conclusive. Agency is an essential element of partnership
just sharing of profits and contribution to losses is not sufficient. It was held that
the receipt by a person of a share in the profits of businesses is prima facie
evidence that he is a partner, but this is not a conclusive test. The question
whether a person is a partner or not therefore depends in nearly all cases upon
whether or not he has the authority to act for other partners and whether or not
other partners have the authority to act for him.

The above discussion establishes that Partnership is the branch of the law of
agency. Section 18 of the Partnership Act further clarifies and confirms this.
Section 18 provides: “Subject to the provisions of this Act, a partner is the agent
of the firm for the purposes of the business of the firm.” Thus the firm as well as
other partners will be bound by the act of the firm.

Intention of parties to be gathered from the language used in the deed, read as a
whole and having regard to the ordinary sensible meaning. It is only where there
is a difference of opinion between the partners that the matter is connected with
the business has to be decided by a majority of partners. Hence control and
management can be exercised by a single partner and need not be by the
majority.
 ADVANTAGES OF PARTNERSHIP:

Following are the advantages of the Partnership:

1) Better decisions: The partners are the owners of the business. Each of them
has equal right to participate in the management of the business. In case of any
conflict, they can sit together to solve the problem. Since all partners participate
in the decision-making process, there is less scope for reckless and hasty
decisions.

2) Flexibility in operations: A partnership firm is a flexible organization. At

any time, the partners can decide to change the size or nature of the business or
area of it’s operation. There is no need to follow any legal procedure. Only the
consent of all the partners is required.

3) Easy to form: Like sole proprietorships, partnership businesses can be

formed easily without any compulsory legal formalities. It is not necessary to
get the firm registered. A simple agreement or partnership deed, either oral or in
writing, is sufficient to create a partnership.

4) Availability of large resources: Since two or more partners join hands to

start a partnership business, it may be possible to pool together more resources
as compared to a sole proprietorship. The partners can contribute more capital,
more effort and more time for the business.
 DISADVANTAGES OF THE PARTNERSHIP:

Following are the disadvantages of the Partnership:

1) Unlimited liability: All the partners are jointly liable for the debt of the firm.
They can share the liability among themselves or any one can be asked to pay
all the debts even from his personal properties depending on the arrangement
made between the partners.

2) Uncertain life: The partnership firm has no legal existence separate from its
partners. It comes to an end with death, insolvency, incapacity or the retirement
of a partner. Further, any unsatisfied or discontent partner can also give notice
at any time for the dissolution of the partnership.

3) No transferability of share: If you are a partner in any firm, you cannot

transfer your share or part of the company to outsiders, without the consent of
other partners. This creates inconvenience for the partner who wants to leave
the firm or sell part of his share to others.

4) Lack of harmony: In a partnership firm every partner has an equal right to

participate in the management. Also, every partner can place his or her opinion
or viewpoint before the management regarding any matter at any time. Because
of this, sometimes there is a possibility of friction and discontent among the
partners. Difference of opinion may lead to the end of the partnership and the
business.

5) Limited capital: Since the total number of partners cannot exceed 20 (10 for
Banking business), the capital to be raised is always limited. It may not be
possible to start a very large business in partnership form.
 CONCLUSION:

It can be said that, a partnership is a form of business. It has at least two

members who joined capital or services for prosecuting of some business.
Partnership is very important because in day to day activities we enter into
partnership agreements and by making partners big goals are achieved with the
help of joint and more number of people. The joint efforts of all the member
results in successful accomplishment of tasks and that task or job can be easily
afforded. Division of work leads to increase in efficiency at work among
different partners.

When some job is done by consent of all the members and if some profit is
earned then it is shared among the different partners. And similar is the case
when some loss occurs then that is also beard among all the members and it’s
not that only one has to take responsibility or give compensation. So in my view
Partnership is a good form of doing business than a company which is owned by
a single person. Partnership is one of the oldest forms of business relationships.
Though limited liability companies have replaced partnership firms in complex
businesses, partnerships are still preferred by professionals and small trading
and business enterprises in India and abroad.

The Indian partnership act of 1932 provides for a general form of partnership
which is the most prevalent form in India, but, over time the general form of
partnership has lost its charm because of the inherent disadvantages in it, the
most important is the unlimited liability of all partners for business debts and
legal consequences, regardless of their holding, as the firm is not a legal entity.

General partners are also jointly and severally liable for tortuous acts of co-
partners. Each partner has the exposure of their personal assets being
appropriated and liquidated to meet partnership dues. These are statutory
position, which cannot be altered by contract inter-se, though at times
subterfuges are resorted to by unscrupulous partners to avoid personal liability.
General partnership holdings are not easy to transfer; typically all other partners
have to agree. Yet partnership is preferred in India, because of the ease of
formation and lack of compliances involved.