NATURE AND EXTENT OF LIABILITY OF FIRM FOR THE ACTS OF A PARTNER

(Sec 18-27)
Sec. 18 partners to be agent of the firm – subject to the provisions of this Act, a partner is the
agent of the firm for the purpose of the business of the firm.
• All the laws applicable to agent would apply on partners as well.
• Agency extended only to the business and does not cover works in the individual
capacity.
• The agency operates against sleeping or dormant partners as well, they too are liable
for the acts of acting or ostensible partners.

NATURE OF LIABILITY
Liability is joint and several (Refer Sec. 25)
• All the partners are liable jointly and severally and the plea that they have limited their
liability cannot be taken by any partner. Though in case a partner pays more than his
share he can claim the same from others.
• Liability subsists only till the time a partner remains in the firm. After retirement no
liability arises.
• Requirement of public notice

Sec. 19 Implied authority of the partners as agent of the firm

Subject to the provisions of section 22 the act of a partner which is done to carry on in the
usual way business of the kind carried on by the firm binds the firm.
• The authority as enumerated under section 19 is implied authority.
• The firm will be bound by implied authority of the firm and the partners.
Reason: Third party may not always know or have excess to the scope of authority partners
do exercise.

Test to determine the scope of implied authority

• The act should be done in relation to the partnership
business and,
• The act should be done in usual way, in relation to the business of the kind carried on
by the firm.

Distinction between trading and non-trading firms as made by the Courts

A firm would be a trading firm if the business consists in buying and selling of goods. There is
an implied power to borrow in a trading firm. Whereas in businesses which are not commercial
rather professional in nature, no partner can borrow or pledge the partnership property so as to
bind the co-partners.
CASE LAWS
Mercantile Credit Co. Ltd. v Garrod (1962) 2 All ER 1103
Sale and purchase of second hand cars could be impliedly considered to be the business of the
firm which deals with letting lock up garage repairing of cars.
Higgins v Beauchamp (1914) 3 KB 1192
The partners were the proprietors of the business of cinematographic theatre. There was
absolute prohibition on unilateral borrowing by one partner. One partner borrowed money and
misappropriated it. Held that, Firm is not that of trading firm and hence no implied authority
of borrowing hence the firm would not be bound by the transaction.

MODE OF EXERCISING AUTHORITY

Sec. 22 In order to bind the firm, an act or instrument done or executed by a partner of other
person on behalf of the firm shall be done or executed in the firm name, or in any other manner
expressing or implying an intention to bind the firm.
Section 19 is subject to section 22 hence implied authority would be applicable only when-
• Done in the name of the firm or,
• In the manner expressing or implying an intention to bind the firm

LIMITATION OF IMPLIED AUTHORITY

19(2) in the absence of any usage or custom of trade to the contrary, the implied authority of a
partner does not empower him to –
• Submit a dispute relating to the business of the firm to arbitration;
• Open a banking account on behalf of the firm in his own name;
• Compromise or relinquish any claim or portion of a claim by the firm;
• Withdraw a suit or proceeding filed on firm’s behalf;
• Admit any liability in a suit or proceeding against the firm;
• Acquire immovable property on firm’s behalf;
• Transfer immovable property belonging to the firm;
• Enters into partnership on behalf of the firm.
The above acts can be done by the partner only after he has been expressly authorized or
there is a custom.

Sec. 20 extension and restriction of partner’s implied authority –

The partners in a firm may, by contract between the partners, extend or restrict the implied
authority of any partner.
Notwithstanding such restriction, any act done by a partner on behalf of the firm which
falls within his implied authority binds the firm unless the person with whom he is dealing
knows of the restriction or does not know or believe that partner to be a partner.
Thus restriction under section 19 is statutory whereas restriction under section 20 is
contractual.

Sec. 21 Partners right in emergency –

Partners can take any action to mitigate the losses of the firm as would be taken up by a
prudent person. The authority here is similar to section 189 of the ICA.
Sec. 23 Admissions made by a partner –
An admission or representation made by a partner concerning the affairs of the firm is an
evidence against the firm if it is made in the ordinary course of business.
Sec. 24 Effect of notice to an active partner
Notice to a partner who habitually acts in the business of the firm of any matters relating to
the affairs of the firm operates as notice to the firm, except in the case of a fraud on the
firm committed by or with the consent of that partner.
• Excludes sleeping or dormant partner.
• Excludes fraudulent acts of a partner.
• Excludes fraudulent acts with the consent of partner.

Section 26 Liability of the firm for wrongful acts of a partner

Where, by the wrongful act or omission of a partner acting in the ordinary course of the
business of a firm, or with the authority of his partners, loss or injury is caused to any third
party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner.

Section 27. Liability of firm for misapplication by partners

Where-
(a) a partner acting within his apparent authority receives money or property from a third
party and misapplies it, or
(b) a firm in the course of its business receives money or property from a third party, and
the money or property is misapplied by any of the partners while it is in the custody of the
firm the firm is liable to make good the loss.