NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

SEVENTH TRIMESTER

LAWS ON BUSINESS ASSOCIATIONS I

PROJECT ON

IMPLIED AUTHORITY OF A PARTNER IN A FIRM

(a detailed analysis of Section 18,19,20,21,22,23,24)

SUBMITTED TO: SUBMITTED BY

PROF. SANJAY YADAV NIMISHA JHA

PROF. ISHAQ QURESHI 2009BALLB01

ENROLMENT NO.: A-0863

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 TABLE OF CASES

Agricultural Insurance Co, In re (1870) 23 LT 424..............................................................05

Higgins v Beaucamp (1914) 3 KB 1192.................................................................................07

Keshari Engg Works v Bank of India AIR 1991 Pat 194......................................................08

Mann v D’Arcy (1968) 1 WLR 893.........................................................................................08

Mercantile Credit Co Ltd v Garrod (1962) 3 All ER 1103.....................................................11

Moti Lal v Unnao Commercial Bank (1930) 32 Bom LR 1571.............................................11

Punamchand v Kapoorchand AIR 1924 Bom 260.................................................................08

S.N. Soni v Taufiq Farooki AIR 1976 Del 63........................................................................09

Sangmer Daal and Flour Mill v FCI (1992) 1 SCC 145.......................................................09

Tomlinson v Broadsmith (1896) 1 QB 386.............................................................................09

Wheatly v Smithers (1907) 2 KB 684 (CA).............................................................................07

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 TABLE OF CONTENTS

INTRODUCTION..................................................................................................................04

DOCTRINE OF IMPLIED AUTHORITY..........................................................................05

SCOPE OF IMPLIED AUTHORITY..................................................................................06

RESTRICITONS ON IMPLIED AUTHORITY................................................................10

AUTHORITY IN EMERGENCY........................................................................................12

MODE OF EXERCISING AUTHORITY...........................................................................13

ADMISSIONS BY A PARTNER..........................................................................................13

EFFECT OF NOTICE TO A PARTNER............................................................................14

BIBLIOGRAPHY..................................................................................................................15

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 INTRODUCTION

One of the most important tests of partnership as agency is the essence of the relationship of

partnership. Therefore, a partner is both a principal and an agent. While the relation between

partners inter se is that of principals, they are agents of the firm and of one another in relation

to third parties for the purposes of the business of the firm.

Thus, each partner is regarded as an agent of the other partners, and as such, a partner, acting

in the course of the business of the firm, can bind his co-partners.

But, in order to bind his co-partners, it is necessary for the partner acting on behalf of the firm

to contract in the firm’s name or in any other manner expressing or implying an intention to

bind his co-partners.

A partner contracting in his own name incurs only a personal liability, and not the collective

liability of the firm.

The mere fact that money borrowed by a partner in his own name on security belonging to

him personally has been used for the purpose of the firm with the knowledge of other partners

does not render them liable.

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 DOCTRINE OF IMPLIED AUTHORITY

The relevant provisions are to be found in Section 18 and 19. Section 18 declares every

partner to be an agent of the firm for the purposes of the business of the firm. Section 18

states that:

Partner to be an agent of the firm- subject to the provisions of this Act, a partner is an

agent of the firm for the purposes of the business of the firm.

Every partner embraces the character of both principal and agent only for the business of the

firm.

In Agricultural Insurance Co, In re,1 JAMES LJ stated the principle as:

[A]s between the partners and the outside world (whatever be their private relations between

themselves) every partner is the unlimited agent of every other in everything connected with

the partnership business...

Thus, the act of a partner done by him as an agent in the usual course of business is an act of

the firm. This is the implied authority of a partner.

1
(1870) 23 LT 424

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 SCOPE OF IMPLIED AUTHORITY
The scope of implied authority is determined in accordance with the provisions of Section 19,

which states that:

19. Implied authority of partner as agent of the firm-

(1) subject to the provisions of Sec. 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 of

a partner to bind the firm conferred by this section is called his implied authority"

(2) In the absence of any usage or custom of trade to the contract, the implied authority of

a partner does not empower him to -

a) Submit a dispute relating to the business of the firm to arbitration.

b) Open a banking account on behalf of the firm in his own name.

c) Compromise or relinquish any claim or portion of a claim by the firm,

d) Withdraw a suit or proceeding filed on behalf of the firm.

e) Admit any liability in a suit or proceeding against the firm

f) Acquire immovable property on behalf of the firm.

g) Transfer immovable property belonging to the firm or

h) Enter into partnership on behalf of the firm

The scope of authority is thus, linked with the nature of the business and the usual manner of

carrying it on.

Whether a given act was done by a partner in carrying on the business in the usual way is a

question to be determined by the nature of business, and by the practices of persons engaged

in it. Since the requirements of one business may be wholly different from those of another

business, the nature of the business and the practices, customs and usages of businessmen

engaged in that kind of business, must be known before it can be said by what acts a partner

can bind the firm.

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 TRADING AND PROFESSIONAL FIRMS

AND BORROWING POWER

For this purpose the courts have been distinguishing trading from non-trading or professional

business, because it is notoriously needful or useful for traders to borrow money and issue

negotiable instruments, but not for professionals.

In Higgins v Beaucamp2, B and M were carrying on business of cinematographic theatre

proprietors in partnership. B was a sleeping partner and M managing partner. Their deed

provided that no partner would borrow money except with the consent of the other or in the

usual course of business. M borrowed two sums of money from the plaintiff H upon the

representation that the money was to be used for the partnership business. But he

misappropriated it. The lender sued the other partner. He was held not liable. There was no

actual authority to borrow money for the business. It had, therefore, to be proved that an

authority was implied from the nature of the business. Since the court found that it was a non-

trading business, there was no implied authority either.

In Wheatley v Smithers3, an effort was made to define trading business. Here a partner of a

firm of auctioneers had borrowed money by accepting a bill of exchange in the firm name.

Holding that the firm was not liable, the court said that an auctioneer is not a trader. While it

is not possible to say exhaustively what constitutes trading, an important element is that a

trading business is one which involves the purchase and sale of goods. An auctioneer does

not buy goods. He only sells those belonging to others.

In Punamchand v Kapoorchand4, a firm constituted for buying and selling of copper and

brass utensils was held to be a trading firm so that the firm was liable for a single partner’s

act of loan.

2
(1914) 3 KB 1192
3
(1907) 2 KB 684 (CA)
4
AIR 1924 Bom 260

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In Keshari Engg Works v Bank of India5, loan documents were signed by all the partners, all

the partners were held liable to repay the loan and it was immaterial that one of them was

acknowledging that it was his personal loan.

JOINT VENTURE

A partner has no implied authority from other partner to enter into a partnership with other

persons in another business. It would require very clear powers to enable a man’s partner to

make him a partner with any other person. But engaging the firm in a single transaction with

another person with a view to sharing its profits is something different from entering into a

partnership.

In Mann v D’Arcy6, the defendants were doing the business of buying and selling potatoes.

The active partner entered into an arrangement with the plaintiff to enter into a joint venture

of a part of cargo of potatoes for sharing the profits of the venture. This was held to fall

within the authority. The arrangement was merely one mode of buying and selling what he

was authorised to buy and sell on behalf of the partnership.

LEGAL PROCEEDINGS

It is within the scope of a partner’s authority to defend an action brought against the firm and

to engage a lawyer for the purpose.

5
AIR 1991 Pat 194
6
(1968) 1 WLR 893

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In Tomlinson v Broadsmith7, the managing partner of a firm, having purchased goods on

credit, the firm was sued. He engaged a solicitor and defended the action but in vain. The

other partner knew nothing about the transaction or the action until the sheriff knocked his

door with the decree. Even so he was held liable. The court described the partner’s action as

nothing but ordinary incidence of business. A working partner may retain a solicitor to

recover a debt due to the partnership. The dormant partner will be liable to pay the fee and

expenses.

PARTNER ACTING IN SELF-INTEREST

Where the act of a partner is within the scope of his implied authority but it has been done by

him, to the knowledge of the third party, not for the firm, but for his own purposes, the firm is

not liable. Thus, payment by a partner of a personal debt from the funds of the firm does not

bind the firm and the firm can recover back the money.

In S.N. Soni v Taufiq Farooki8, the Delhi High Court held that the act of a partner in

assigning a promissory note for lesser value was beyond his authority but became binding on

the firm when the other partners subsequently ratified it.

In Sanganer Daal and Flour Mill v FCI 9, the court held that it would be for the partners to

assert that one of them who contracted had no authority in the matter or that he did not

contract for and on behalf of the firm. Where no such objection was raised and also the

forfeiture of security deposit by the other party was not protested, it was held that the firm

was bound by the transaction.

RESTRICTIONS ON IMPLIED AUTHORITY

7
(1896) 1 QB 386
8
AIR (1976) Del 63
9
(1992) 1 SCC 145

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When a partner is prohibited from doing an act which would otherwise be within the scope of

his implied authority, it is said that the implied authority of the partner has been restricted.

Such restrictions are of two kinds:

1. Statutory restrictions

2. Those imposed by the deed

1. STATUTORY RESTRICTIONS:

Statutory restrictions are imposed by Section 19(2). The sub-section lists a number of things

that the implied authority of a partner does not empower him to do without consulting the

other partners. The section states that:

(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-

(a) Submit a dispute relating to the business of the firm to arbitration,

(b) Open a banking account on behalf of the firm in his own name,

(c) Compromise or relinquish any claim or portion of a claim by the firm,

(D) Withdraw a suit or proceeding filed on behalf of the firm,

(e) Admit any liability in a suit or proceeding against the firm,

(f) Acquire immoveable property on behalf of the firm,

(g) Transfer immoveable property belonging to the firm, or

(h) Enter into partnership on behalf of the firm.

These restrictions are effective against the rem whether a particular person contracting with

the firm has knowledge of them or not.

2. RESTRICTIONS BY AGREEMENT

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The second kind of restrictions is those which may be imposed by the partnership deed or any

agreement between the partners. Section 20 states that:

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 any 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.

In other words, if the act in question is within the scope of the partner’s implied authority, the

firm is bound unless it can be shown:

1. That the person contracting with the partner had knowledge of the restriction, or

2. That he did not know or believe the partner to be a partner.

In Mercantile Credit Co Ltd. v Garrod10, P and G were partners in a business of letting lock-

up garages and repairing cars. G was a sleeping partner. A clause in the deed prohibited the

partners from buying and selling cars on behalf of the firm. P, the active partner, sold a car to

which the firm had no title and obtained £700. When the buyer found that the seller had no

title to sell, he claimed £700 from G, the sleeping partner. G was held liable. Garage owners

usually sell second hand cars. The act was, therefore, within the scope of the implied

authority, the plaintiff did not know of any restriction in the deed but he did know that he was

dealing with a partner within the scope of his usual authority.

In Moti Lal v Unnao Commercial Bank11, a trading firm was held liable when one of its

partners borrowed money by accepting a bill of exchange despite the restrictions on

borrowing contained in the partnership deed, the other party being unaware of such a

provision in the deed.

AUTHORITY IN EMERGENCY
10
(1962) 3 All ER 1103
11
(1930) 32 Bom LR 1571

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The implied authority of a partner empowers him to do only such acts as are usually done in

carrying on the kind of business in which the firm is engaged. A power to do what is usual

does not include the power to do what is unusual however urgent. The section purports to

extend the authority of a partner in emergency.

Section 21 states that:

Partner's authority in an emergency: A partner has authority, in an emergency, to do all

such acts for the purpose of protecting the firm from loss as would be done by a person of

ordinary prudence, in his own case, acting under similar circumstances, and such acts

bind the firm.

The requirements of the section can be enumerated as follows:

1. There should be an emergency.

2. The partner should have tried to protect the firm from loss threatened by the

emergency.

3. The act must be reasonable in the circumstances.

The test of reasonableness adopted by the section is that the partner must have taken such

steps as would have been done by a person of ordinary prudence in his own case and under

similar circumstances.

MODE OF EXERCISING AUHTORITY

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Section 22 lays down the manner in which a partner is to act on behalf of the firm. It states:

Mode of doing act to bind firm: In order to bind a firm, an act or instrument done or

executed by a partner or 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.

Thus, the partner acting for the firm must expressly or impliedly let the other party know that

he acts for the firm. The other party must know how his representative character as an agent

of the firm. Where a partner fails to do this will incur personal liability on the contract and

the firm may not be liable. Thus, where a partner signed a pronote described himself as

proprietor of the firm; liability of the firm did not arise.

ADMISSIONS BY PARTNER
Section 23 states:

Effect of admissions by a partner: An admission or representation made by a partner

concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary

course of business.

An ‘admission’ is a statement by which a person acknowledges the existence of a fact against

his own interest. If a partner makes a statement in the ordinary course of the business of the

firm by which he admits a fact or liability that is an admission against the firm.

Representations or misrepresentations made by a partner in course of the business of the firm

are binding upon the firm. But representations by a partner as to the scope of his implied

authority do not bind the firm because that authority depends upon the usual manner of

carrying business and not upon a partner’s representations. If this were not so, the partnership

firms would be at the mercy of unscrupulous partners.

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 EFFECT OF NOTICE TO PARTNER
Notice to a partner is a notice to the firm provided the conditions laid down in Section 24 are

fulfilled.

Section 24 states:

Effect of notice to acting partner: Notice to a partner who habitually acts in the business of

the firm of any matter 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.

The requirements of the section are:

1. The word ‘notice’ means actual not constructive notice.

2. The notice must be given to a partner who habitually acts in the business of the firm,

that is, to an active partner as opposed to a dormant or sleeping partner.

3. The partner receiving the notice should not have withheld it from the firm either by

his own fraud or in conspiracy with the third party.

Where a proper notice is given it will be effective even against a retired partner.

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 BIBLIOGRAPHY
Avtar Singh, Mercantile Law, 8th Edn., Eastern Book Company

V.P. Verma, Law Of Partnership In India, 5th Edn., Oriental Law House ND

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