CONTRACTS – II

(SPECIAL
CONTRACTS)
P.J.NAIDU
B.Sc., M.H.R.M.,L.L.M
Topics to be covered under the
subject
• Guarantee
• Indemnity.
• Bailment.
• Pledge.
• Agency.
• Sale of Goods and
• Partnership.
• The Indian Partnership Act, 1932
• The Nature of Partnership.
• Existence of partnership – sharing of profits.
• Creditor-debtor relationship.
• Partnership property.
• Relations of partners to third parties
• Registration of Firms and Dissolution of a firm
• Reference of dispute to arbitration as envisaged in the partnership
agreement.
• Partnership for a fixed term – dissolution on expiry of the term.
• Suit for dissolution of partnership and accounts.
• Dissolution of firm – No public notice.
• Mode of settlement of accounts.
• The Sale of Goods Act, 1930
• Papers of Clients – not goods.
• ‘Sale’ and ‘Agreement to Sell’.
• Statutory Transactions.
• Contract For Works/Labour.
• Hire-Purchase agreements.
• Doctrine of Caveat Emptor.
• Reliance by buyer on seller’s skill.
• Passing of property.
• The right of an innocent buyer.
• Right of an un-paid seller.
• The Indian Contract Act, 1872.
• Indemnity and Guarantee (Ss 124-147).
• Bailment and pledge (Ss 148-181).
• ‘Agent’ and ‘Principal’ defined;
• Who may employ an agent and who may be appointed as an agent;
• Rights, duties and liabilities of principal and agent, scope and
limitation, ratification and revocation of authority;
• Appointment of sub-agent.
 The Indian Partnership Act,
1932
• History and growth of Law of Partnership.
• Custom and Usage of Trade as Origin.
• Partnership Law under Different Schools of Thought:
i. Hindu Law of Partnership.
ii. Babylonian Law of Partnership.
iii. Jewish Law of Partnership.
iv. Roman Law of Partnership.
v. French Law of Partnership
vi. English Law of Partnership and etc.,
• It was incorporated in Chapter XI (Ss 239 to 266) of
the Indian Contract Act, 1872.
• In 1932 the Indian Partnership Act came in force with
effect from 1st day of October, 1933.
• It is divided into 8 chapters consisting of 74 sections
and Schedule I.
• Chapter I: Sections 1 to 3 deal with title
commencement and application of Indian Contract
Act.
• Chapter II: Sections 4 to 8 deal with the definition
and nature of partnership.
• Chapter III: Sections 9 to 17 deal with relation of partners
to one another.
• Chapter IV: Sections 18 to 30 deal with relations of partners
to third party.
• Chapter V: Ss 31 to 38 deal with incoming and outgoing
partners.
• Chapter VI: Ss 39 to 55 deal with dissolution of firms.
• Chapter VII: Ss 56 to 71 deal with registration of
partnership.
• Chapter VIII : Ss 72 & 74 deal with mode of public notice
and savings.
• Schedule I: Contains fees under S.71(1) for different types
of documents and inspection of documents relating.
• WHEREAS it is expedient to define and amend the law relating to partnership.
• Definitions:
(a) an “act of a firm” means
any act or omission
by all the partners, or
by any partner or agent of the firm
which gives rise to a right
enforceable by or against the firm;
(b) “business” includes every trade, occupation and profession;
(d) “third party” used in relation to a firm or to a partner therein means any
person who is not a partner in the firm; and
(e) expressions used but not defined in this Act and defined in the ICA, shall have
the meanings assigned to them in that Act.
S.4 Definition of “partnership”,
“partner”, “firm” and “firm
name”:-
• “Partnership” is the relations between persons
who have agreed to
share the profits of
a business carried
by all or any of them acting for all.
Persons who have entered into partnership with one another are
called individually “partners” and collectively a “firm”, and the name
under which their business is carried on is called the “firm name”.
 K.D.Kamath & Co. v.
Commissioner of Income Tax
(1971) 2 SCC 873
• Brief Facts : The appellant was a firm consisting of 6 partners and the
partnership was constituted under the document, dated 20-3-1959.
• The business is stated to have been carried on in partnership from 1-10-58.
• The partnership was registered under the Act, 1932 on 11-8-59.
• For the assessment year 1959-60, corresponding to the previous year ending
March 31, 1959.
• The appellant filed an application to the ITO for registration and it declined
to grant on the ground that there was no genuine partnership brought into
existence by the deed.
• It held that the business should be held to the sole concern of K.D.Kamath.
• The sum and substance of his finding was that there was no relationship
of partners inter se created under the said document.
• The Department did not challenging the genuineness of the document.
• On appeal, the AAC confirmed the order of ITO.
• On appeal the Tribunal held that the deed did create a relationship of
partners inter se between the parties and directed the ITO to register the
frim.
• The CIT made an application u/S.66(1) of the Income-Tax Act praying for a
reference to the High Court of the question of law.
• The HC examined and answered the question against the assesse.
• Issues: “Whether, on the facts and in the circumstances of the case,
M/s K.D.Kamath & Co., could be granted registration u/S.26-1 of the
Act for the assessment year 1959-60?”
• Whether the alleged deed creates partnership or not as per the Act?
• Observations:
• Partnership deed: “Instrument of partnership”:- Articles of agreements
made at Hubli, this 20th day of March, 1959, among 6 partners.
• All Hindu inhabitants, residing at Hubli, and whereas the parties from 2
to 6, who have been serving with party No.1 since a very long time
lending their honest and sincere services.
• The party No.1 has been pleased to convert his sole proprietary
concern, as a partnership concern.
• That the duration of the partnership shall be at will.
 4. The business is running at Hubli and shall run at Hubli or at such other place or
places in the style of ‘M/s.K.D.Kamath & Co., Engineers and Contractors’ or in such
other name or names that the parties may from time to time decide and agree
upon.
5. After perusal of the accounts, keeping some money for work expenses, the
remaining net profit or losses, as the case may be, shall be shared by the parties.
6. It is agreed among the partners that the party No1 shall be the principal and
financing partner and the rest of the partners are admitted only as working
partners contributing labor.
7. That the good-will of the firm shall be wholly and solely belong to party No.1
8. Party No.1 is the principal and financing partner and shall have full right of
control and management of the firm’s business and in the best interests of the
firm, party No.s 2 to 6 shall always work according to the instructions and
directions given from time to time by K.D.Kamat. In regard to any new business or
giving tenders for new works, shall always vest with him, whose decision shall be
final and binding upon all the working partners.
 9. It is also agreed among the partners that no working partner or partners is/are
authorized to raise a loan for and on behalf of the firm or pledge the firm’s interest
directly or indirectly and such an act shall not be binding on the firm, except under
the written authority of the principal partner.
10. It further agreed that only Parties No.1 and 2 shall do contract business.
11. Party No.1 shall alone operate the Bank accounts.
12. That in the course of business or during the existence of the firm’s business the
principal partner shall have a right to remove such a working partner/s and he or
they shall have only right of profit or loss up to that date. In regard to the progress
of the business or otherwise up to the date of retirement, only on the completed
the works.
13. That proper books of accounts shall be kept by the said parties and entries
made of all transactions and they are accessible to all.
14. That each partner shall be just and faithful to the other or others.
15. Each partner shall withdraw such sums as mutually determined by the partners
from time to time and in case of loss, the same shall be made good by the partners.
• 16. Thus subject to the provisions herein mentioned and laid down
and made thoroughly known by each of the parties to this
agreement with sound mind and body,
• the firm’s affairs be carried on for mutual gain and benefit and if any
questions which may arise or occur touching to the conduct or
management or liability of the firm,
• the same shall be amicably settled among the parties with the
consent of principal partner, whose decision in the matter shall be
final and binding on all partners.
• In considering the question whether the partnership deed creates
the relationship of partners as between the parties thereto, as
understood in law, it is desirable to have a complete picture of the
entire document.
• The HC has rested its decision on 5 circumstances for holding that there is
no relationship of partners as per the clauses 8, 9 and 16.
1. The management as well as the control of the business is entirely left in
the hands of the alleged first partner K.D.Kamath.
2. The other partners can merely work under his directions and share in the
profits and losses in accordance with the proportion mentioned in clause 5.
3. It is not within the power of the parties No.s 2 to 6 to act agent of other
parties.
4. The said parties cannot accept any business except with the consent of
K.D.Kamath; and
5. Those parties cannot raise any loan or pledge the firm’s interest, directly
or indirectly except under the written authority of K.D.Kamath.
In view of all these circumstances, according to the HC, one of the
essential element to constitute partnership, namely, agency is lacking.
• Here the clause no.1 and 6 to be read together and reads out that party no.1 is
the main financing and managing partner of the business and rest of them are
working partners contributing labour.
• Cl 4 deals with the running of the partnership at home place and other place
or places as per the agreement.
• From Clauses 1, 2 and 3, it is clear that the business of the partnership is that
of Engineers and Contractors and he is an experienced person in this business.
• In our opinion, establish that the sole proprietary concern of K.D.Kamath has
vanished.
• It is also establish the right of each of the partners to share the profits and
also to bear the losses in the proportion of their shares mentioned in Cl (5).
• Therefore, one of the essential ingredients to constitute partnership that there
should be an agreement to share the profits and the losses of the business is
more than amply satisfied in this case.
• In certain decisions of the High Courts the two essential conditions
necessary to form the relation of partnership have been stated to
be:
1. that there should be an agreement to share the profits and losses
of the business, and
2. that each of the partner should be acting as agent of all.
• The legal requirements u/S.4 of the Act to constitute a partnership
in law are :
1. there must be an agreement to share the profits or losses of the
business; and
2. the business must be carried on by all the partners or any of them
acting for all.
there is implicit in the 2nd requirement the principle of agency.
• The fact that the exclusive power and control, by agreement of the parties,
is vested in one partner or the further circumstances that only one partner
can operate the bank accounts or borrow on behalf of the firm are not
destructive of the theory of partnership provided two essential conditions
are satisfied.
• Cl (16) is to the effect that the firm’s affairs which are managed by party
No.1 is really for the mutual gain and benefits of all the partners.
• It is true that the 2nd essential test of the business being carried on by all or
any of the partners acting for all must be satisfied.
• The provisions in the deed clearly establish that Party No.1 carries on the
business, acting for all the partners.
• U/s. 18 of the Act, a partner is the agent of the firm for the purpose of the
business of the firm, but this Section itself clearly says that it is subject to
the provisions of the Act.
• S.11 Determination of rights and duties of partners by contract
between the partners:-
(1) Subject to the provisions of this Act,
the mutual rights and duties of the partners of a firm
may be determined by contract between the partners, and
such contract may be expressed or may be implied
by a course of dealing.
Such a contract may be varied
by consent of all the partners, and
such consent may be expressed or may be implied
by a course of dealing.
• Agreement in restraint of trade:-
(2) Notwithstanding anything contained in S.27 of ICA,
such contracts may provide that
a partner shall not on any business
other than that of the firm
while he is a partner.

S.18. Partner to be agent of the firm:

Subject to the provisions of this Act,
a partner is the agent of the firm
for the purposes of the business of the firm.
• It is open to the parties u/s. 11 to enter into an agreement regarding their
mutual rights and duties as partners of the firm and that can be done by
contract, which in this case is evidenced by the deed of partnership.
• Further S.18 will have to be read along with S.4.
• If the relationship of partners is established as a “partnership” as defined
in S.4, and if the necessary ingredients referred to in that section are
found to exist, there is no escape from the conclusion that in law a
partnership has come into existence.
• S.18 only emphasizes the principle of agency which is already
incorporated in the definition of “partnership” u/S.4.
• Learned counsel for the Revenue, placed some reliance on S.14 of the Act.
• According to the counsel, there is no contract to the contrary in the
partnership deed that the assets brought in by party No.1, do not belong
to the partnership.
• S.14. The property of the firm:-
Subject to contract between the partners,
the property of the firm includes
all property and rights and interests in property
originally brought into the stock of the firm, or
acquired, by purchase or otherwise,
by or for the firm, or
for the purposes and
in the course of the business of the firm,
and includes also the goodwill of the business.
Unless the contrary intention appears,
property and rights and interest in property acquired
with money belonging to the firm
are deemed to have been acquired for the firm.
• It is his further contention that u/S.14, those assets will belong to the
partnership, in which case, it will be open to any partner, as agent of the
other partners to pledge the firm’s interest or raise loan for partnership
purposes.
• This right, according to the counsel is restricted by Cl(9) and that clause
negatives the theory of agency.
• In our opinion, this contention of the learned counsel cannot be
accepted.
• S.14 of the Act itself clearly shows that the provisions contained therein
are subject to the contract between the parties.
• We have already held that the provision regarding the control and
management vesting in party No.1 is not by itself destructive of the
theory of partnership.
• Cl(9) in our opinion, itself shows that the theory of agency is recognized.
• But the parties, by mutual agreement, have placed a restriction on
the working partners right to borrow on behalf of the firm or pledge
the firm’s interest without the written authority of the principal
partner.
• Conclusion:
• We are of the opinion that all the ingredients of partnership are
satisfied under the partnership deed, dated March 20, 1959 and
• that the view of the HC that the appellant-firm cannot be granted
registration u/S.26-A of the Income-Tax Act for the assessment year
1959-60, cannot be sustained.
• In the result, we answer the question of law in the affirmative in
favor of the assesse.
 Cox v. Hickman (1860) 8 H.L.C.
268
• Brief Facts: Smith and Smith carried on business under the name of B.Smith & Son.
• They got into difficulties and called a meeting of their creditors.
• Later they executed a deed of arrangement in favor of their creditors.
• The parties to the deed being S and S of the first part, five of the creditors (including
Cox and Wheatcroft) of the second part, and the general body of creditors of the
third part,
• And the deed provided that the 5 creditors of the second part were to carry on the
business of S. and S. as trustees for the creditors under the name of “The Stanton
Iron Company’,
• And to divide the net income of the business, after paying the expenses, among the
general creditors of S. and S., such net income to be deemed to be of the creditors to
be held,
• And that at any such meeting a majority in value of the creditors present was to
have power to make rules as to the mode of conducting the business, or
• To order its discontinuance, and that when all the debts had been paid the
trustees were to hold the property assigned under the deed in trust for S. and S.
themselves.
• The deed also contained a covenant by the parties who executed it, not to sue S.
and S. for their debts.
• Cox never in fact acted as a trustee, and Wheatcroft resigned six weeks after the
deed, and before the goods for which bills now sued were given had been
supplied, and no new trustees were appointed in place of Cox and Wheatcroft.
• The remaining three of the five creditors who were the parties to the deed, of
the second part, carried on the business under the provisions of the deed, and
goods were supplied to the business by Hickman.
• Hickman drew three bills of exchange for the goods supplied by him, those bills
were accepted on behalf of the Stanton Iron Company by one of the above
mentioned three creditors.
• Hickman sued Cox and Wheatcroft on those three bills, and alleged that they
were liable upon them as partners in the business of the Stanton Iron
Company because they were two of the five creditors who were the original
parties to the deed of the 2nd part and had executed the deed accordingly.
• Issues:
1. Whether the defendants by executing the deed, as creditors of M/s Smith
& Co., rendered themselves liable to the creditors who should afterwards
deal with the trustees appointed by this deed to carry on the new firm of
“The Stanton Iron Company”.
2. The plaintiff alleges that although the Defendants never acted or held
themselves out as partners in this new firm, and the creditors of the new
firm are entitled to sue the creditors of the old firm as partners in the new
firm.
• Observations :
• THE LORD CHANCELLOR (LORD CAMPBELL): It is quite clear that the creditors of the
old firm, by executing the deed, never intended to incur such a liability, and
• I think that the creditors of the new firm cannot be supposed to have dealt with
this firm in the belief that they could have a remedy against all or any of the
creditors of the old firm.
• Is there such a participation in the profits of the new firm by the creditors of the
old firm, as to make them partners in the new firm?
• They certainly are not partners inter se, as was properly held by the Master of the
Rolls and they could derive no profits from the new business, beyond the payment
of the debts due to them from the old firm.
• There was a formal release of these debts; but we must look at the real nature of
the transaction, according to the understanding of all who were parties to it.
• The business of the firm S & Co. was to be carried on by the trustees till the debts
of that firm were paid, and then the business was to be transferred back to S & Co.
• I am of opinion that the creditors of the old firm cannot be considered, by
executing the deed, as having authorized the trustees as their agents either to
purchase the goods or to accept the bills…
• I must, therefore, advise your Lordships to reverse the judgment of the Court
of Common Pleas, and to adjudge that the Defendants below are not liable, as
acceptors of the bills of exchange, on which the action is brought.
• LORD CRANWORTH:-
• I concur with those of the learned Judges who are of opinion that no solid
distinction exists between the liability of either defendant in an action on the
bills, and in an action for goods sold and delivered.
• The liability of one partner for the acts of his co-partner is in truth the liability
of a principal for the acts of his agent.
• Where two or more persons are engaged as partners in an ordinary trade, each
of them has an implied authority from the others to bind them all by contract
according to the usual course of business in that trade.
• Every partner in trade is for the ordinary purposes of the trade, the agent of
his co-partners, and all are therefore liable for the ordinary trade contracts of
the others.
• Partners may stipulate among themselves that some one of them only shall
enter into particular contracts, or into any contracts, or that as to certain of
their contracts none shall be liable except those by whom they are actually
made;
• But with such private arrangements third persons, dealing with the firm
without notice, have no concern.
• The public have a right to assume that every partner has authority from his co-
partners to bind the whole firm in contracts made according to ordinary
usages of trade.
• This principle applies not only to persons acting openly and avowedly as
partners, but to others who, though not so acting, are by secret or private
agreement, partners with those who appear ostensibly to the world as the
persons carrying on the business.
• In the case now before the House, the Court of Common Pleas decided in
favor of the respondent that the appellant, by his execution of the deed of
arrangement, became, together with the other creditors who executed it, a
partner with those who conducted the business of the Stanton Iron Company.
• The Judges in the Court of Exchequer Chamber were equally divided so that
the judgment of the Court of Common pleas was affirmed.
• The sole question for adjudication by your Lordships is, whether this judgment
thus affirmed was right.
• There is an assignment by Smith to certain trustees of the mines and all the
engines and machinery used for working them, together with all the stock in
trade,
• All their property, upon trust to carry on the business, and after paying its
expenses, to divide the net income rateably amongst the creditors of M/s
Smith, as often there shall be funds in hand sufficient to pay one shilling in the
pound; and after all the creditors are satisfied, then in trust for M/s. Smith.
• The creditors, thought they executed the deed are merely passive, and the first
question is, what would have been the consequence to them of their executing the
deed if the trusts had ended there?
• Would they have become partners in the concern carried on by the trustees merely
because they passively assented to its being carried on upon the terms that the net
profits should be applied in discharge of their demands.
• I think not; it was argued that as they would be interested in the profits, therefore
they would be partners. But this is a fallacy.
• It is often said that the test, or one of the tests, whether a person not ostensibly a
partner, is nevertheless, in contemplation of law, a partner, is whether he is entitled
to participate in profits.
• This, no doubt is in general, a sufficiently accurate test; for a right to participate in
profits affords cogent, often conclusive evidence that the trade in which the profits
have been made, was carried on in partnership for or on behalf of the person setting
up such a claim.
• But the real ground of the liability is that the trade has been carried on by persons
acting on his behalf.
• When that is the case he is liable to the trade obligations, and entitled to its
profits, or to a share of them.
• It is not strictly correct to say that his right to share in the profits, make him
liable to the debts of the trade.
• It seems to follow that the mere concurrence of creditors in an arrangement
under which they permit their debtor, or trustees for their debtor, to continue
his trade,
• applying the profits in discharge of their demands, does not make them
partners with their debtor, or the trustee.
• The debtor is still the person solely interested in the profits, save only that he
has mortgaged them to his creditors.
• The trade is not carried without it all the property might be seized by them in
execution.
• But the trade still remains the trade of the debtor or his trustees; the debtor or
the trustees are the persons by or on behalf of whom it is carried on.
• In this deed special powers are given to the creditors, the powers may be
described briefly as, 1st, a power of determining by a majority in value of their
body, that the trade should be continued, or, if not discontinued, then, 2ndly, a
power of making rules and orders as to its conduct and management.
• The creditors might, by process of law, have obtained possession of the whole
of the property.
• They stipulate for a right to withdraw it altogether; or, if not, then to impose
terms as to the mode in which the trustees to which they had agreed should
be executed.
• The trade did not become a trade carried on for them as principals, because
they might have insisted on taking possession of the stock, and so compelling
abandonment of the trade, or because they might have prescribed terms on
which alone it should be continued.
• I have on these grounds, come to the conclusion that the creditors did not, by
executing this deed, make themselves partners in the Stanton Iron Company.
• LORD WENSLEYDALE:- The question is whether either of the defendants, Cox or
Wheatcroft, was liable as acceptor of certain bills of exchange….drawn by the
plaintiff below on the Stanton Iron Company, and accepted by one James
Haywood as “per Pro” that Company.
• The simple question will be this, whether Haywood was authorized by either of
the defendants, as partner in that company, to bind him by those acceptances.
• Haywood must be taken to have been authorized to accept for them by those who
actually carried on business under that firm.
• Were the appellants partners in it? The case will depend entirely on the
construction of the deed…
• There is no other evidence affecting either of them.
• And the question is whether the subscription of both, as creditors of the Smiths,
made them partners in the business carried on by the trustees in the name of the
Stanton Iron Company.
• Wheatcroft could not be made liable in the character of trustee, for he had caused
as such before the bills were drawn, and the plaintiff knew it.
• One of the provisions in the deed was this: that it gave authority to the
trustees to execute all contracts and instruments in carrying on the business,
which would certainly authorize the making or accepting bills of exchange.
• The question then is, whether this deed makes the creditors who sign in
partners with the trustees, or what is really the same thing, agents, to bind
them by acceptances on account of the business.
• As per Mr.Justice Story’s work on partnership: “Every partner is an agent of the
partnership, and his rights, powers and duties, and obligations, are in many
respects governed by the same rules and principles as those of an agent; a
partner virtually embraces the character of both a principal and agent.”
• A man allows another to carry on trade, whether in his own name or not, to
buy and sell and to pay over all the profits to him, is undoubtedly the principal,
and the person so employed is the agent,
• And the principal is liable for the agent’s contracts in the course of his
employment.
• If two or more agree that they should carry on a trade, and share the profits of
it, each is a principal, and each is an agent of the other, and each is bound by
the other’s contract carrying on the trade, as much as a single principal would
be by the act of an agent, who was to give the whole of the profits to his
employer.
• It is that he who partakes the advantage ought to bear the loss, often stated in
the earlier cases on this subject is only the consequence, not relation of
principal, agent, and partner.
• Can we then collect from the trust deed that each of the subscribing creditors is
a partner with the trustee and by the mere signature of the deed constitutes
them his agent for carrying on the business on the account of himself and the
rest of the creditors? I think not.
• It is not true that by this deed the creditors will gain an advantage by the
trustees carrying on the trade;
• for if it is profitable, they may get their debts paid, but this is not that sharing of
profits which constitutes the relation of principal, agent and partner.
• If a creditor were to agree with his debtor to give the latter time to pay his
debt till he got money enough out of his trade to pay it,
• I think no one could reasonably contend that he thereby made him his agent
to contract debts in the way of his trade;
• Nor do I think that it would make any difference that he stipulated that the
debtor should pay the debt out of the profits of the trade.
• The deed in this case is merely an arrangement by the Smiths to pay their
debts, partly out of the existing funds and partly out of the expected profits of
their trade;
• And all their effects are placed in the hands of the trustees, as middlemen
between them and their creditors, to effect the object of the deed, the
payment of their debts.
• These effects are placed in the hands of the trustees as the property of the
Smiths, to be employed as the deed directs, and to be returned to them when
the trusts are satisfied.
• Conclusion:
• I think it is impossible to say that the agreement to receive this
debt, so secured, partly out of the existing assets, partly out of the
trade, is such a participation of profits as to constitute the relation
of principal and agent between the creditors and trustees.
• The trustees are certainly liable, because they actually contract by
their undoubted agent; but the creditors are not, because the
trustees are not their agents.
• I, therefore, advise your Lordships to reverse the judgment.
• Judgment reversed.
• S.6 Mode of determining existence of partnership:-
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 1:-
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 2:-
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 of itself make him a partner
with the persons carrying on the business;
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 received or partner with the persons carrying on the
business.
S.5 Partnership created by status:-
The relation of partnership arises from contract and not from status;
and, in particular,
the members of a HUF carrying on a family business as such, or
Burmese Buddhist husband and wife carrying on business as such
are not partners in such business.
S.7 Partnership at will.-
Where no provision is made by contract between the partners
for the duration of their partnership, or
for the determination of their partnership,
the partnership is “partnership at will”.

S.8 Particular partnership.-

A person may become a partner with another person in particular adventures or
undertakings.
 Mollwo, March & Co. v. The
Court of Wards
(1872) L.R. 4 P.C. 419
• Brief Facts:- The Plaintiffs/Appellants, merchants of London, brought an action
against the late Rajah Pertab Chunder Singh, to recover a balance of nearly 3 lacs of
rupees claimed to be due to them from the firm of W.N.Watson & Co. of Calcutta.
• The Rajah having died during the pendency of the suit, the defence was continued
by the Respondent, the Court of Wards, on behalf of his minor heir.
• The plaint alleged that the firm of W.N.Watson & Co. consisted of W.N.Watson,
T.O.Watson, and the Rajah, liable as a partner in it.
• The 2 Watsons commenced business in partnership, as merchants in Calcutta, as
merchants at Calcutta, in 1862, under the firm of W.N.Watson & Co.
• Their transaction consisted principally in making consignments of goods to
merchants in England, and receiving consignments from them.
• The Watsons had little or no capital.
• The Rajah supported them, and in 1862 and 1863, he made large advances to
enable them to carry on their business, partly in cash, but chiefly by accepting
bills, which the Rajah met at maturity.
• In the middle of 1863, the total amount of these advances was considerable and
the Rajah desired to have security for his debt and for any future advances he
might make and also wished to obtain some control over the business by which he
might check what he considered to be the excessive trading of the Watsons.
• Accordingly, an agreement was entered between the Rajah of the one part, and
Watson & Co. on the other part,
• In consideration of money already advanced and which might be thereafter
advanced by the Rajah to them, the Watsons agreed to carry on their business
subject to the control of Rajah in several important particulars.
• Under the agreement, whilst the advances made by the Rajah remained unpaid,
the Watsons bound themselves not to make shipments, or order consignments, or
sells goods, without his consent.
• No money was to be drawn from the firm without his sanction, and he was to
be consulted with regard to the office business of the firm, and he might direct
a reduction or enlargement of establishment.
• It was also agreed that the shipping documents should be at his disposal, and
should not be sold or hypothecated, or the proceeds applied, without his
consent;
• And that all the proceeds of business should be handed to him, for the purpose
of extinguishing his debt.
• They further agreed to, and in fact did, hand over to the Rajah “as security” the
title deeds of certain tea plantations, and they also agreed, that “as further
security” all their property including landed or otherwise including their stock
in trade, should be answerable for the debt due to him.
• The agreement was not signed by the Rajah, but he was undoubtedly an
assenting party to it.
• Subsequent to the agreement, the Rajah made further advances, and the
amount due to him ultimately exceeded three lacks of rupees.
• In 1864 and 1865, the firm of Watson & Co fell into difficulties.
• An arrangement was then made under which the Rajah upon the Watsons executing to
him a formal mortgage of the tea plantations, to secure the amount of his advances,
released to them, by a deed all relating to commission and interest under the
agreement, all other claims against them.
• In point of fact, the Rajah up to this time, had never received possession of any of the
properties or moneys of the firm, nor any of the proceeds of the business;
• And did not in fact receive any commission.
• A sum of Rs.27,000 on this account was, indeed, placed to his credit in the books of the
firm in a separate account opened his name, but the sum so credited was never paid to
him and was subsequently “written back” by the Watsons.
• Some evidence was given as to the extent of the interference of the Rajah in the control
of the business.
• It seems the Rajah knew little of its details for it was conceded that the Rajah availed
himself only in a slight degree of the powers of the control conferred upon him by the
agreement;
• In fact, that he did no more, but much less, than he might have done under it.
• Issues: Whether the Rajah be made liable for the debts of the Watsons & Co as one
of the partner of the firm?
• Whether the Rajah can be called as a partner of the firm and he be made liable for
the creditors?
• Observations: The exact amount is a question in dispute in the appeal, that a large
balance became due from the firm to the Plaintiffs during the time when it is
contended that the Rajah was in partnership with the two Watsons.
• The question in the appeal depend, on the construction and effect of a written
agreement entered into between Watsons and the Rajah…
• The subsequent acts of the Rajah do not in any way add or enlarge his liability.
• No liability can in this case be fastened upon the Rajah on the ground that he was
an ostensible partner.
• It is admitted that he did not so hold himself out; and
• That a statement made by one of the Watsons to the Plaintiffs to the effect that he
might be in law a partner, by reason of his right to commission on profits, was not
authorized by the Rajah.
• The liability, therefore, of the Rajah for the debts contracted by Watsons & Co.
must depend on his real relations to that firm under the agreement.
• It was contended, for the Appellants, that he was so liable:
• 1stly, because he became by the agreement, at least as regards third persons, a
partner with the Watsons; and
• 2ndly, because, if not “a true partner”, the Watsons were the agents of the Rajah
in carrying on the business and the debt to the Plaintiffs was contracted within
the scope of their agency.
• In the absence of any law or well established custom existing in India on the
subject, English law may properly be resorted to in mercantile affairs for
principles and rules to guide the Courts in that country to a right decision.
• But while this is so, it should be observed that in applying them, the usages of
trade and habits of business of the people of India, so far as they may be
peculiar, and differ from those in England, ought to be borne in mind.
• The agreement, on the face of it, is an arrangement between the Rajah, as
creditor, and the firm consisting of the two Watsons as debtors, by which the
Rajah obtained security for his past advances;
• And in consideration of forbearance, and as an inducement to him to support
the Watsons by future advances, it was agreed that he should receive from
them a commission of 20 % on profits, and should be invested with the powers
of supervision and control above referred to.
• The primary object was to give security to the Rajah as a creditor of the firm.
• It was contended at the Bar that, whatever may have been intention, a
participation in the net profits of the business was in contemplation of law
such cogent evidence of partnership that presumption arose sufficient to
establish, as regards 3rd parties, that relation unless rebutted by other
circumstances.
• The rule of construction involved in this contention is too artificial.
• It takes one term only of the contract and at once raises a presumption upon
it.
• The whole scope of the agreement, and all its terms, ought to be looked at
before any presumption of intention can be made properly at all.
• It was established as a positive rule of law, that participation in the net profits
of a business made the participant liable as a partner to third persons.
• Upon the principle that, by taking a part of the profits, he takes from the
creditors a part of that fund which is the proper security to them for the
payment of their debts.
• The rule was evidently an arbitrary one, and subsequent discussion had let to
the rejection of the reason for it as unsound.
• Whilst it was supposed to prevail, much hardship arose from its application,
and a distinction, equally arbitrary was established between a right to
participate in profits generally “as such” and a right to payment by way of salary
or commission “in proportion” “to a given quantum of the profits”.
• “Nor does it appear to make any difference whether the money is received by
way of interest on money lent, or wages, or salary as agent, or commission on
sales.”
• The present case appears to fall within this distinction.
• The Rajah was not entitled to a share of the profits “as such”, he had no specific
property or interest in them qua profits for, subject to the power given to the
Rajah by way of security, the Watsons might have appropriated or assigned the
whole profits without any breach of the agreement.
• The Rajah was entitled only to commission, or a payment equal in proportion to
one-fifth of their amount.
• This distinction has always been admitted to be thin, but it may be observed
that the supposed rule itself was arbitrary in the sense of being imposed by law
and of being founded on an assumption opposed in many cases to the real
relation of the parties;
• And when the law thus creates a rule of liability and a distinction both equally
arbitrary, the distinction which protects from liability is entitled to as much
weight as the rule which imposes it.
• In the Judgment of Cox v. Hickman had certainly the effect of dissolving the rule of law
which had been supposed to exist, and laid down principles of decision by which the
determination of cases, of this kind is made to depend, not on arbitrary presumptions.
• Profits of trade is a strong test of partnership, and that there may be cases where,
from such participation alone, it may as a presumption not of law but of fact, be
inferred;
• Yet that whether that relation does or does not exist must depend on the real
intention and contract of the parties.
• It is certainly difficult to understand the principle on which a man who is neither a real
nor ostensible partner can be held liable to a creditor of the firm.
• The reason given in Grace v. Smith, that by taking part of the profits he takes part of
the fund which is the proper security of the creditors, is now admitted to be unsound
and insufficient to supports it;
• For of course the same consequences might follow in a far greater degree from the
mortgage of the common property of the firm, which certainly would not of itself
make the mortgagee a partner.
• Where a man holds himself out as a partner, or allows others to do it, the case
is wholly different.
• He is then properly estopped from denying the character he has assumed, and
upon the faith of which creditors may be presumed to have acted.
• A man so acting may be rightly held liable as a partner by estoppel.
• Again, wherever the agreement between parties creates a relation which is in
substance a partnership, no mere words or declarations to the contrary will
prevent, as regards third persons, the consequences flowing from the real
contract.
• [It was strongly urged that the large powers of control and the provision for
empowering the Rajah to take possession of the consignments and their
proceeds, in addition to the commission on net profits, amounted to an
agreement of this kind, and that the Rajah was constituted, in fact, the
managing partner]……argument from the appellant…
• Arguments: The contract undoubtedly confers on the Rajah large power of control.
• Whilst his advances remained unpaid, the Watsons bound themselves not to make
shipments, or order consignments, or sell goods, without his consent.
• No money was to be drawn from the firm without his sanction, and he was to be
consulted with regard to the office business of the firm, and he might direct a
reduction or enlargement of the establishment.
• It was also agreed that the shipping documents should be at his disposal, and
should not be sold or, hypothecated, or the proceeds applied, without his consent;
• And that all the proceeds of the business should be handed to him, for the
purpose of extinguishing his debt.
• On the other hand, the Rajah had no initiative power;
• He could not direct what shipments should be made or consignments ordered, or
what should be the course of trade.
• He could not require the Watsons to continue to trade, or even to remain in
partnership; his powers, however large, were powers of control only.
• No doubt he might have laid his hands on the proceeds of the business;
• And not only so but it was agreed that all their property, landed and otherwise
should be answerable to him as security for his debt.
• Their Lordships are of opinion that by these agreements the parties did not
intend to create a Partnership, and that their true relation to each other under
the agreement was that of creditors and debtors.
• The Watsons evidently wished to induce the Rajah to continue his advances, and
for that purpose were willing to give him the largest security they could offer;
• But a partnership was not contemplated and the agreement is really founded on
the assumption, not of community of benefit, but of opposition of interests.
• It may well be that where there is an agreement to share the profits of a trade,
and no more, a contract of partnership may be inferred, because there is
nothing to show that any other was contemplated;
• But that is not the present case, where another and different contract is shown
to have been intended, viz., that of loan and security.
• It was strongly insisted for the Appellants that if “a true partnership” had not
been created under agreement,
• the Watsons were constituted by it the agents of the Rajah to carry on the
business, and that the debt of the Plaintiffs was contracted within the scope of
their agency.
• Of course, if there was no partnership, the implied agency which flows from
that relation cannot arise, and the relation of principal and agent must on some
other ground be shown to exist.
• It is clear that this relation was not expressly created, and was not intended to
be created by the agreement, and that if it exists it must arise by implication.
• It is said that it ought to be implied from the fact of the commission on profits,
and the powers of control given to Rajah.
• But this is again an attempt to create, by operation of law, a relation opposed to
the real agreement and intention of the parties, exactly in the same manner as
that of partners was sought to be established, and on the same facts and
presumptions.
• Their Lordships have already stated that reasons which have led them to the
conclusion that the trade was not agreed to be carried on for the common benefit
of the Watsons and the Rajah so as to create a partnership;
• And they think there is no sufficient ground for holding that it was carried on for
the Rajah as principal, in any other character.
• He was not, in any sense, the owner of the business, and had no power to deal with
it as owner.
• None of the ordinary attributes of principal belonged to him.
• The Watsons were to carry on this business;
• He could neither direct them to make contracts, nor to trade in the manner which
he might desire;
• His powers were confined to those of control and security, and subject to those
powers, the Watsons Remained owners of business and of the common property of
the firm.
• The agreement in terms and, as their Lordships think, in substance, is founded on
the relation of creditor and debtors, and establishes no other.
• Conclusion: Their Lordships opinion in this case is founded on their belief that the
contract is really and in substance what if professes to be viz., one of loan and
security between debtors and their creditor.
• If cases should occur where any persons, under the guise of such an arrangement,
are really trading as principals, and putting forward, as ostensible traders,
• Others who are really their agents, they must not hope by such devices to escape
liability;
• For the law, in cases of this kind, will look at the body and substance of the
arrangement, and fasten responsibility on the parties according to their true and
real character.
• For the above reasons their Lordships think that the Judges of the HC, in holding
that Rajah was not liable for the debts of the firm of Watson & Co., took a correct
view of the case;
• And they will, therefore, humbly advise Her Majesty to affirm their judgement,
and to dismiss this appeal with costs.