Mutual Rights and Liabilities of Partners (Sections 9–17) →

Chapter III of the Indian Partnership Act, 1932, comprising Sections 9 to 17, governs the relations of partners to one another — their mutual rights and duties inter se. The chapter rests on a single organising idea: a partnership is a creature of agreement, so the partners are largely free to settle their own affairs, but that freedom is overlaid by a non-negotiable substratum of good faith. Section 9 fixes the irreducible duties of fidelity; Section 10 makes the fraud of a partner his own to answer for; Sections 12 to 16 supply the default rules on conduct, profits, interest, indemnity, property and competition that a contrary contract may displace; and Section 17 carries those rights and duties forward when the firm changes shape.

This chapter sets out the statutory scheme, the duty of utmost good faith and its leading cases, the rule against secret profits and competing business under Section 16, the default rules of Section 13 on equal sharing and interest, the law of partnership property under Sections 14 and 15, and the continuance provision in Section 17. It builds on the foundations laid in our chapters on the introduction, scheme and definitions and the nature of partnership and its essential tests.

The scheme of Chapter III

Chapter III opens at Section 9 and runs to Section 17. The arrangement is deliberate. Section 9 states the general duties that bind every partner; Section 10 imposes the duty to indemnify the firm for fraud. These two provisions are mandatory — they are not prefaced by the saving words "subject to contract between the partners", and they cannot be excluded by agreement. Sections 11 to 16, by contrast, set out rights and duties that are expressly made subject to the contract between the partners; they operate as default rules that fill the gaps left by the partnership agreement and yield to any contrary stipulation.

The distinction matters in practice. Section 13(b), for instance, entitles partners to an equal share in the profits; if the agreement fixes an unequal ratio, that ratio prevails, but if the agreement is silent, Section 13(b) supplies the answer. The mandatory core — good faith under Section 9 and liability for fraud under Section 10 — stands outside this freedom, because the relationship of partners is fiduciary and the law will not let a partner bargain away the standard of honesty the relationship demands. The wider definition of partnership and the tests by which it is recognised are treated in our note on the nature of partnership.

Section 11 — the partners' freedom of contract

Section 11(1) provides that, subject to the provisions of the Act, the mutual rights and duties of the partners may be determined by contract between the partners, and that such contract may be express or may be implied by a course of dealing. The same sub-section allows the contract to be varied by the consent of all the partners, consent which may itself be express or implied by a course of dealing. Section 11 is the statutory expression of the most important principle of partnership law — that, so far as possible, partners should be free to arrange their affairs amongst themselves: how much capital or labour each contributes, the ratio in which profits are divided, who manages and who sleeps.

That freedom, however, is bounded. The opening words "subject to the provisions of this Act" subordinate any contract to the mandatory provisions — most importantly Sections 9 and 10. Section 11(2) carries a further, specific power: notwithstanding Section 27 of the Indian Contract Act, 1872 (which voids agreements in restraint of trade), the partners may agree that a partner shall not carry on any business other than that of the firm while he is a partner. This is one of the recognised statutory exceptions to the rule against restraint of trade, and it dovetails with the duty not to compete under Section 16(b), discussed below. For the relationship between a partnership and adjacent legal forms, see our note on partnership versus co-ownership, HUF, company and club.

Section 9 — the general duties: good faith

Section 9 provides that partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. The section condenses three duties: the duty of utmost good faith, the duty to work for the greatest common advantage, and the duty of true accounts and full disclosure.

The duty of good faith is the bedrock. Partners stand to one another in a relationship of utmost good faith — uberrimae fidei — comparable to that of insurer and insured. The relationship is founded on mutual confidence and trust; there is mutual agency between the partners, each being the agent of the others for the firm's business. As Bacon V.C. famously put it in Helmore v. Smith (1886) 35 Ch D 436, the partners' "mutual confidence is the life-blood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust one another that the business goes on." A stronger case of fiduciary relationship, the same judgment observed, can scarcely be conceived than that which exists between partners.

Good faith becomes acute in particular settings — where one partner seeks to expel another, where a partner buys out another's share, where a working partner acts on behalf of a sleeping partner, or where a transaction would let one partner gain at the expense of the rest. Conduct that destroys mutual confidence may justify dissolution. The duty is also reciprocal: a partner who complains that the others fail in their duty towards him must himself be ready at all times to perform his duty towards them, as Const v. Harris (1824) Turner & Russell 496 establishes. One who is himself in breach cannot found a complaint on a like breach by others.

Greatest common advantage and secret profits

The duty to carry on the business to the greatest common advantage requires a partner to direct his efforts to securing the maximum profit for the firm and to share with his co-partners any benefit he obtains from the firm's affairs in which the firm is in honour and conscience entitled to participate. A partner may not obtain an advantage at the firm's expense. If he makes a secret profit out of a firm transaction, or takes a contract in his own name that he ought to have procured for the firm, or buys the firm's goods cheaply for himself instead of selling them to a third party, he cannot keep the benefit — he must account for it to the firm.

The classic illustration is Bentley v. Craven (1853) 18 Beav 75. A partner in a firm of sugar refiners, who had unusual skill in buying sugar at advantageous times, was entrusted with purchasing stock for the firm. Instead of buying in the open market, he supplied the firm with his own sugar, bought earlier at a much lower price, at the prevailing market rate — making a considerable profit which he did not disclose to his partners. The court held that the firm was entitled to recover the profit so made. The duty to account does not turn on whether the firm suffered loss; it flows from the partner's fiduciary character. This principle is reinforced by Section 16(a), considered below, and connects with the agency analysis explained in our note on the essentials of partnership.

True accounts and full information

The third limb of Section 9 obliges every partner to render true accounts and full information of all things affecting the firm. A partner must keep and render a true and complete account of all partnership moneys in his hands; he must spend partnership funds properly for the firm's business and keep proper vouchers. He must not mix his own money with the firm's, nor wrongly spend or misappropriate the firm's money — if he does, he is accountable for it. The duty of full information has an active quality: a partner cannot stay silent about matters affecting the firm in the expectation that his co-partners will not ask. The right of access to the firm's books under Section 12(d), discussed below, is the procedural counterpart of this disclosure duty.

Section 10 — indemnity for fraud

Section 10 provides that every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. The section is another aspect of the basic duty of partners to conduct themselves honestly, both towards their co-partners and towards persons dealing with the firm. Where a partner departs from honest dealing and loss results to the firm, he alone bears it — he must compensate or indemnify the firm against the loss caused by his own fraud.

Crucially, the liability for fraud cannot be excluded by any agreement to the contrary. While the partners may agree among themselves to limit or exclude liability for negligence, want of skill or ordinary misconduct, they may not contract out of liability for fraud, for it would be opposed to public policy to exempt a person from the consequences of his own fraud. Section 10 should be read with Section 13(f), which provides that a partner must indemnify the firm for loss caused by his wilful neglect — a separate, default head of liability that, unlike fraud, is subject to contract between the partners.

Section 12 — conduct of the business

Section 12, subject to contract between the partners, settles the conduct of the business through four rights. Under clause (a), every partner has a right to take part in the conduct of the business; the right is enforceable in a court of law, though the partners may agree that only some of them shall manage. Under clause (b), every partner is bound to attend diligently to his duties — the duty of diligence, breach of which feeds the indemnity for wilful neglect under Section 13(f). Negligence by one partner can cause loss to the whole firm, but Section 13(f) requires the neglect to be "wilful": a mere inadvertence or accident does not suffice; there must be a deliberate or conscious commission or omission, awareness of the wrong being good evidence of wilfulness.

Clause (c) regulates differences of opinion. Ordinary or routine matters connected with the business may be decided by a majority, but every partner has the right to express his opinion before the matter is decided; matters of fundamental importance — admitting a new partner, or changing the nature of the business — require the consent of all. No change may be made in the nature of the business without unanimity, so that no new business can be undertaken against the will even of a single partner. The majority's power is itself bounded by good faith: a majority that expelled a partner without sufficient cause would find the expulsion set aside. Clause (d) gives every partner — active or dormant — the right to have access to, inspect and copy the books of the firm, a right he may exercise personally or through an agent.

The right to restrain misconduct rounds out the picture. In Suresh Kumar Sanghi v. Amrit Kumar Sanghi, AIR 1982 Del 131, the Delhi High Court granted an injunction against a partner who wrote to the firm's principals (Mahindra & Mahindra) seeking suspension of supplies, and to the firm's bankers instructing them not to honour the firm's cheques, in a bid to weaken the managing partner — conduct designed to damage the firm's business. The court held that it would restrain a partner from acting inconsistently with his duties during the subsistence of the partnership, whether or not dissolution was also sought.

Section 13 — mutual rights and liabilities

Section 13, again subject to contract, supplies the default financial terms of the partnership. Under clause (a), a partner is not entitled to remuneration for taking part in the conduct of the business unless the partners agree otherwise; the so-called remuneration paid to a working or salaried partner is, in substance, a distribution of profits, the firm not being a separate employer of its partners — a point underscored in Keshavji Ravji & Co. v. Commissioner of Income Tax, (1990) 2 SCC 231, where the Supreme Court treated payments to partners as appropriations of profit rather than as deductible business expenditure.

Under clause (b), partners are entitled to share equally in the profits and must contribute equally to the losses. The equality is striking: it applies even where the partners contributed capital unequally, possess unequal skill, or have laboured unequally for the firm. A partner who asserts an unequal share bears the burden of proving an agreement to that effect. Where the profit shares are agreed to be unequal but nothing is said about losses, the losses follow the profit ratio. The liability to contribute equally to losses arises only where the partners are entitled to share equally in profits.

Clauses (c) and (d) deal with interest. Under clause (c), where a partner is entitled to interest on the capital he has subscribed, that interest is payable only out of profits — reflecting the view that interest on capital is in substance an appropriation of profits. In the absence of an express agreement, no interest on capital is allowed at all. Clause (d) stands on a different footing: a partner who makes a payment or advance beyond his agreed capital is entitled to interest on it at six per cent per annum. Such an advance is treated as a loan to the firm, on which the partner stands as a creditor independent of his character as partner; the firm is chargeable with interest when the advance is to the firm, not when it is to a co-partner. Under clause (e), the firm must indemnify a partner for payments made and liabilities incurred in the ordinary and proper conduct of the business, and in protecting the firm from loss in an emergency, as a person of ordinary prudence would act in his own case. Where the loss arises from the partner's own improper conduct, no indemnity lies; nor is contribution recoverable in respect of illegal transactions.

Section 16 — personal profits and competing business

Section 16 gives statutory force to the principle that a partner must act for the greatest common advantage rather than for personal profit. Subject to contract between the partners, clause (a) provides that if a partner derives any profit for himself from any transaction of the firm, or from the use of the property, business connection or name of the firm, he must account for that profit and pay it to the firm. Clause (b) provides that if a partner carries on any business of the same nature as, and competing with, that of the firm, he must account for and pay to the firm all profits made by him in that business.

Clause (a) is the statutory home of the rule in Bentley v. Craven. A partner is a fiduciary; if, as agent, he makes a profit out of his principal's business, he must disclose and surrender it — the position aligning with Sections 215 and 216 of the Indian Contract Act on an agent's duty to account. The duty bites even where the gain was made unconsciously, and extends to any benefit a partner obtains from information acquired within the scope of the partnership business. A partner must not let his personal interest conflict with his duty to the firm: if, without his co-partners' knowledge, he buys the firm's property and profits, he must account for that benefit. The principle is reflected in Gordon v. Holland (1913), an English authority in which a partner who sold the firm's land to a purchaser and then repurchased it for himself was held bound to give the firm the benefit of the repurchase.

Clause (b) supplements the express power conferred by Section 11(2) to restrain a partner from carrying on any business other than the firm's. The two operate together: Section 11(2) validates an express covenant against outside business, while Section 16(b) imposes a default accountability for competing business even without an express covenant. The duty not to compete during the subsistence of the partnership should be contrasted with the position of an outgoing partner, whose freedom to carry on a competing business after he leaves is governed by Section 36 — a topic taken up in the chapters on dissolution and the rights of outgoing partners.

Section 14 — the property of the firm

Section 14 provides that, 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, together with the goodwill of the business. Property and rights acquired with money belonging to the firm are, unless a contrary intention appears, deemed to have been acquired for the firm. The expression "all property and rights and interests in property" is wide: a firm may own land or other immovable property, leasehold or tenancy interests, goodwill or trade marks, and even secret profits or property acquired by a partner in breach of his duty of good faith.

Two evidential points recur in the cases. First, mere use of a partner's property for the firm's business does not convert it into firm property; it becomes firm property only where there is an indication of an intention to treat it as such. Second, where property is purchased with the firm's money and in the firm's name, the strongest presumption arises that it is firm property; where it is bought with the firm's money but in a partner's name, it is a question of fact whether the intention was to keep it as joint estate or to convert it into the partner's separate estate — the general principle being that a partner in whose name partnership estate stands holds it as trustee for the firm.

The leading Indian authority on the distinction between partnership property and joint family property is Lachhman Das v. Gulab Devi, AIR 1936 All 270. Members of a joint Hindu family effected a partition but agreed to continue the family business as a partnership; their shares in the business were varied but their shares in the property were not, except that they would hold equally any property later acquired. On a partner's death and the dissolution of the firm, the question was whether certain properties were partnership property or joint family property. The Allahabad High Court held that what is partnership property depends mainly on the agreement, express or implied; that joint ownership of immovable property used for the firm's business does not by itself make the property partnership property; and that the unchanged shares in the property — contrasted with the varied shares in the business, and the absence of the property from the firm's accounts — were strong evidence that the partners did not intend it to be a firm asset. The nature of a partner's interest in firm property was authoritatively settled in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300: once property is brought into the common stock it ceases to be the exclusive property of the contributing partner, and a partner's interest is a right to share in the profits and, on dissolution, in the surplus assets after debts — not a claim to any specific item of firm property.

Section 15 — use of firm property

Section 15 provides that, subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business. The firm's property is for the firm's business, not for the private use of any partner. Although every partner has an interest in the property, no partner can deal with any specific item as his own, nor assign his interest in a specific item to a stranger; his right is to his share of the profits from time to time and, on dissolution, to a share of the assets remaining after the firm's liabilities are met. This is the operative consequence of Addanki Narayanappa. If a partner derives any profit or personal advantage from the use of firm property, he must account for it under Section 16(a), which ties the property provisions back to the duty of good faith.

Section 17 — changes in the firm

Section 17 addresses what happens to the mutual rights and duties of the partners when the firm changes. Subject to contract between the partners, it contemplates three situations. First, where a change occurs in the constitution of the firm — for example, the addition or removal of a partner — the mutual rights and duties of the continuing partners remain as far as may be the same as they were before the change. Second, where a firm constituted for a fixed term continues to carry on business after the term expires, the mutual rights and duties remain, so far as they are consistent with the incidents of a partnership at will, the same as they were before expiry. Third, where a firm constituted to carry out one or more ventures or undertakings carries out additional ventures, the mutual rights and duties in respect of the additional ventures are the same as those in respect of the original ventures.

The unifying premise is continuity: a change in membership, term or scope does not, of itself, rewrite the partners' bargain; the existing rights and duties carry forward unless and until the partners agree otherwise. The position of a firm whose fixed term has expired connects directly with the distinction between a partnership at will and a particular partnership, treated in our note on partnership and cognate relations and in the wider material on the hub page for the Indian Partnership Act.

Distinctions and MCQ angles

Several distinctions recur in objective papers. First, the mandatory versus default divide: Sections 9 and 10 cannot be contracted out of, whereas Sections 12 to 16 each open with "subject to contract between the partners" and yield to a contrary agreement. A favourite trap asks whether partners can exclude liability for a partner's fraud — they cannot, by reason of public policy, though they may limit liability for negligence. Second, the two indemnities run in opposite directions: under Section 10 (and Section 13(f)) the partner indemnifies the firm — for fraud and for wilful neglect respectively — while under Section 13(e) the firm indemnifies the partner for proper payments and emergency expenditure.

Third, the interest distinction: interest on capital under Section 13(c) is payable only out of profits and only if agreed, whereas interest on an advance beyond agreed capital under Section 13(d) is payable at six per cent per annum and treats the partner as a creditor. Fourth, equality under Section 13(b) is independent of capital or labour — equal profits and equal losses unless the contrary is proved. Fifth, on property, the watchword is intention: mere use of a partner's property for the firm does not make it firm property (Lachhman Das), and a partner's interest in firm property is not a right to any specific asset but to a share of profits and surplus (Addanki Narayanappa).

Practical takeaways

Three points for the candidate and the practitioner. First, when drafting or reading a partnership deed, identify which terms are mandatory and which are merely default: a deed may rearrange profit ratios, interest, management and indemnity almost at will, but it can neither dilute the duty of good faith under Section 9 nor exclude liability for fraud under Section 10. Second, the rule against secret profits and competing business under Section 16, anchored in Bentley v. Craven and reinforced by Section 11(2), is a recurring source of accountability disputes — a partner who gains from the firm's transactions, property, connection or name must surrender that gain. Third, in property disputes the decisive question is the partners' intention, gathered from the deed, the conduct of the parties and the firm's accounts, rather than from the bare fact of use; and a partner cannot claim any specific item of firm property, only a share in profits and, on dissolution, in the net assets.

Sections 9 to 17 thus draw the inner constitution of the firm — the balance between the partners' freedom to contract and the fiduciary floor the law insists upon. The next stage of the subject moves outward, to the relations of partners with third parties under Sections 18 to 30, where the law of partnership becomes, in substance, an extension of the law of agency. For the foundations, return to our notes on the scheme and definitions and the tests of partnership.

Frequently asked questions

Can partners contract out of the mutual duties in Sections 9 to 17?

Partly. Section 11 makes the mutual rights and duties of partners a matter of contract, express or implied by a course of dealing, subject to the provisions of the Act. Sections 12 to 17 are each prefaced by the words 'subject to contract between the partners', so the rules they lay down — equal profit sharing, interest on advances, the use of firm property, the bar on competing business — operate only as default rules that a contrary agreement displaces. But the duties in Section 9 (good faith, greatest common advantage, true accounts) and the liability to indemnify the firm for fraud under Section 10 are core obligations that cannot be negatived by agreement, because contracting out of liability for one's own fraud is opposed to public policy.

What is the duty of good faith between partners under Section 9?

Section 9 binds every partner to carry on the business to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm. The relationship is one of utmost good faith (uberrimae fidei). As Bacon V.C. observed in Helmore v. Smith (1886) 35 Ch D 436, the partners' mutual confidence is the life-blood of the concern. The duty is reciprocal; a partner who complains that others fail in their duty must himself be ready to perform his, as Const v. Harris (1824) Turn & R 496 establishes.

Must a partner account to the firm for a secret profit?

Yes. Under Section 16(a), if a partner derives any profit for himself from any transaction of the firm, or from the use of the firm's property, business connection or name, he must account for that profit and pay it to the firm. In Bentley v. Craven (1853) 18 Beav 75, a partner skilled in buying sugar supplied the firm with his own stock at the market price but at a concealed profit; the firm was held entitled to recover the profit. The duty to account does not depend on whether the firm suffered any loss — it flows from the partner's fiduciary character as an agent of the firm.

How are profits shared in the absence of an agreement?

Section 13(b) provides that, subject to contract, partners are entitled to share equally in the profits and must contribute equally to the losses. This equality applies even where the partners have contributed capital unequally or have laboured unequally for the firm. A partner who asserts an unequal share bears the burden of proving an agreement to that effect. Where the profit shares are agreed to be unequal but nothing is said about losses, the losses are borne in the same proportion as the profits.

When is a partner entitled to interest on capital and on advances?

Section 13(c) provides that where a partner is entitled to interest on the capital he has subscribed, that interest is payable only out of profits — reflecting the principle that interest on capital is in substance an appropriation of profits. In the absence of an express agreement, no interest on capital is allowed. Section 13(d), by contrast, gives a partner who makes a payment or advance beyond his agreed capital a right to interest at six per cent per annum; such an advance is treated as a loan to the firm, on which the partner stands as a creditor independent of his character as partner.

What property counts as partnership property under Section 14?

Section 14 provides that, subject to contract, the property of the firm includes all property and rights originally brought into the stock of the firm, or acquired by purchase or otherwise by or for the firm or in the course of its business, together with the goodwill. Property acquired with the firm's money is presumed to be the firm's property unless a contrary intention appears. Mere use of a partner's property for the firm's business does not convert it into firm property without an intention to treat it as such — the position taken in Lachhman Das v. Gulab Devi, AIR 1936 All 270. A partner's interest in firm property is a right to share in the profits and, on dissolution, in the surplus assets, not a claim to any specific item, as held in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300.