Relations of Partners to Third Parties (Law of Partnership)

The Indian Contract Act, 1872, governed the field of partnership law before the passage of the Indian Partnership Act, 1932. However, given the quick expansion of trade and industry as well as the escalating industrialization, a distinct partnership law was urgently required. “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all,” as stated in section 4 of the Indian Partnership Act, 1932. In this case, the individuals who have formed a partnership are referred to as Partners, and as a group, they are known as a Firm. A firm name is the name that all of the partners use to jointly manage the firm. In a partnership firm, two or more individuals work together to run a business to make money and divide that money according to the partnership deed’s established profit-sharing ratio.

Key Takeaways:

• Among company owners and entrepreneurs, partnerships are among the most well-known forms of commercial agreements.
• A partnership must be established under Section 12 of the Indian Partnership Act to conduct a lawful business.
• The general rules of the Indian Contract Act will, in any event, apply in situations where the Partnership Act is silent.
• Mutual agency is fundamental for the creation of valid partnership.

Relations of Partners with Third Parties

The Indian Partnership Act 1932, Section 18, outlines a partner’s function as an agent. A partner has obligations to the parties engaged in the business since he represents the firm. Therefore, a partner in a commercial partnership must act as both an agent and a principle. A partner assumes the position of principle when he acts in the best interests of the firm as a whole. However, he is operating as an agent when he is doing so in the best interests of the other partners. Partners’ relationships with outside parties necessitate that they act as the firm’s agents. A partner is never, however, fully in charge of the transactions.

As a result, a partner accepts the traits of the principle and the agent. He is thus operating as a principle if he acts in the partnership’s best interests and on his own behalf. He is nevertheless operating as an agent if he acts on behalf of and in the best interests of his partners. It is crucial to remember that a partner serves as the firm’s agent solely for commercial purposes. He does not function as an intermediary in any of the partnerships’ business operations.

Express Authority of a Partner

• Express authority is that which is granted to a partner under a partnership deed specifically. Put differently, a stated agreement refers to the authority that is chosen and agreed upon by both partners and is included in the partnership agreement as terms and conditions.
• Express authority is provided under the partnership deed, which is made before beginning any partnership firm. A formal agreement is prepared in which all the facts of the partnership are documented to prevent future issues or disputes.
• The name of this type of formal agreement is a partnership deed. Although a formal partnership deed is not required, an oral agreement is acceptable, it is recommended to have one. Written communication is more credible than spoken communication.

Implied Authority of a Partner

According to Section 21 of the Indian Partnership Act 1932, each partner is empowered to take whatever action a prudent person would take in an emergency to save the firm from harm. A firm is bound by such conduct. A partner is the firm’s agent for the purposes of the firm’s business, subject to the Partnership Act’s restrictions. Therefore, if the requirements outlined in Section 19(1) of the Partnership Act are met, a transaction entered into by one partner on behalf of the business is binding on the firm and entails liability on the part of all partners. The term “implied authority” refers to a partner’s ability to bind the business as granted by this clause. The following may be the implied authority of a partner:

• Send a disagreement pertaining to the firm’s operations to arbitration.
• Create a bank account for the firm under his name.
• Give up all or a portion of a claim made by the firm.
• Redraw a lawsuit or other legal action brought on the firm’s behalf.
• Accept responsibility for any actions or lawsuits brought against the firm.
• Get a piece of real estate for the firm
• Transfer a firm-owned piece of real estate
• Form a partnership on the firm’s behalf.

Extension or Restriction of a Partner’s Implied Authority

• The terms of the current contract between the various partners in the firm determine how much authority a partner may extend or restrict. Nonetheless, a partner may act on his own behalf if he has the express consent of another partner, as granted by an agreement or if the trade’s conventions allow it.
• A firm’s partners may agree in writing to increase or decrease a partner’s implied power under Section 20 of the Indian Partnership Act, 1932. Only in situations where the third party is aware of the restrictions or is unaware that he is interacting with a partner of the firm do these limitations or extensions apply to them.

Partner’s Authority in an Emergency

In the event of an emergency, each partner is authorized by Section 21 of the Indian Partnership Act, 1932, to take whatever action a prudent person would take to safeguard the firm from harm. A firm is bound by such conduct. In an emergency, a partner must take all necessary steps to safeguard the firm from suffering losses that a prudent individual would do in a comparable situation. The business will be bound by the partner’s actions. The section’s criteria are as follows:

• There was a crisis at hand.
• In view of it, the partner took action.
• To prevent losses for the firm, the partner took such action.
• In those conditions, the conduct made sense and was prudent.

Liability of Partners to Third Parties

To clarify the nature of a partner’s obligation in a partnership, Section 25 includes the following provision:

• Partner’s responsibility for firm actions. All partners are responsible for the firm’s actions throughout their time as partners, both severally and collectively with the other partners. The actions of an agent acting on behalf of a principal are subject to liability.
• As mentioned above, in accordance with Section 18, a partner is the firm’s agent for the purposes of the firm’s business. As a result, it follows that every act committed by any partner on behalf of the firm automatically entails liability for the actions of the whole firm.
• Regarding the nature of the partners’ accountability, Section 25 declares that each partner is accountable for all business actions taken while he or she is a partner, jointly and severally.
• The case of M/s Glorious Plastics Ltd v. Laghate Enterprises established that a retiring partner cannot be held accountable for an act performed after retirement under section 25 if the partner leaves on April 1, 1982, and the act is completed by the business on March 1, 1985.
• Even if one of the partners may have carried out the firm’s actions, they are all jointly and severally liable. As a result, a third party may, if desired, file a lawsuit against any one of them singly or against any two or more of them collectively.

Conclusion

Several provisions that control how partners of a company interact with outside parties. The Indian Partnership Act, 1932, provides information on several circumstances in which partners may engage in various types of relationships with a third party under Sections 18 to 22. A partnership is an arrangement wherein participants consent to split the company’s earnings. They can all carry on the business, or any one of them can act on behalf of the others. According to this definition, a partner may act as another person’s agent.

Relations of Partners to Third Parties- FAQs

Which act covers the provisions regarding the Relations of Partners with third parties?

The Indian partnership Act 1932 covers the provisions regarding the relations of partners with third parties. Section 18 to Section 22 covers the same.

What is a Partnership?

According to the provisions of Section 4 of the Indian Partnership Act, 1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.”

What is the true test of Partnership?

In simple terms, for an existence of a partnership, mutual agency is must. Also, for determining the existence of a partnership, following elements are needed to be proved:

• Agreement between all the persons engaged as partners.
• Agreement contains the provision to share the profits of a business.
• Business is carried on by all or any of them acting for all.

What are the provision regarding the Partner’s authority in emergency?

The section’s criteria are as follows:

• There was a crisis at hand.
• In view of it, the partner took action.
• To prevent losses for the firm, the partner took such action.
• In those conditions, the conduct made sense and was prudent.

When contracting with third parties, can a Partner represent himself?

No, a partner has obligations to the parties engaged in the business since he represents the firm. Therefore, a partner in a commercial partnership must act as both an agent and a principle.

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