Relations of Partners to Third Parties (Sections 18–30) →

Sections 18 to 30 of the Indian Partnership Act, 1932 govern the outward face of a partnership — how the acts of one partner bind the firm and the others, and how the firm answers to the outside world. The organising idea is captured in a single phrase from Section 18: every partner is the agent of the firm for the purposes of its business. From that agency flow implied authority, joint and several liability, the firm's responsibility for wrongful acts and misapplications, the estoppel-based doctrine of holding out, the limited rights of a transferee of a partner's share, and the special, protected position of a minor admitted to the benefits of partnership.

This chapter sets out the statutory scheme provision by provision, anchoring each in leading authority. It builds on the foundations laid in our chapters on the introduction, scheme and definitions and the nature of partnership and its essential tests, where the agency principle first surfaced as the true test of partnership, distinct from mere profit-sharing.

Scheme of Sections 18 to 30

The relations of partners to third parties, dealt with in Chapter IV of the Act, fall into four natural groups. First, the liability of the partners for the contracts of the firm — Sections 18 to 25, built on the principle of mutual agency. Second, the liability of the firm for the torts and misapplications of a partner — Sections 26 and 27. Third, the doctrine of holding out, which fastens the liability of a partner onto a non-partner — Section 28. Fourth, two provisions on changes in the personnel of the firm as they affect outsiders: the rights of a transferee of a partner's interest under Section 29, and the position of a minor admitted to the benefits of partnership under Section 30.

The thread running through all four groups is agency. The classic statement is that of Lord Wensleydale in Cox v. Hickman (1860) 8 HLC 268, the leading case that repudiated profit-sharing as the conclusive test of partnership and placed partnership liability on the footing of mutual agency: "where two or more persons are engaged as partners in an ordinary trade, each of them has an implied authority from the other to bind all by contracts entered into according to the usual course of business in that trade. Every partner in trade is the general agent of the firm." Section 18 codifies that principle for India.

Partner as agent of the firm — Section 18

Section 18 states the foundational rule: each partner is at once a principal and an agent. He is a principal in that the acts of the others bind him; he is an agent in that his own acts bind the firm and the other partners. The agency is, however, a special one. It is confined to the business of the firm; an act outside the scope of the firm's business does not bind the firm merely because a partner did it. Because the third party dealing with a firm cannot always know what authority each partner actually holds, the law protects the third party by attributing to every partner the authority usually possessed by partners in that kind of business — a protection developed through the concept of implied authority in Section 19.

The agency analysis also explains why a firm is not a separate legal person under the Act. The firm is merely a compendious name for the partners; an act of "the firm" is an act of one or more partners on behalf of all. This is the conceptual point that distinguishes a partnership from a company, a co-ownership and a Hindu undivided family — distinctions worked out in our chapter on partnership versus co-ownership, HUF, company and club.

Liability of a partner — Section 25

Section 25 makes the liability of partners both joint and several. A third party may, at his option, sue any one partner alone, or any two or more jointly, or all of them — no partner can insist that the others be joined. Nor can a partner shelter behind an internal agreement that limits his share of liability: as between the firm and the outside world, the liability is unlimited. A partner who is compelled to pay more than his share may, of course, claim contribution from his co-partners; but that is an internal adjustment that does not concern the creditor.

Two temporal limits attach to the section. The liability arises only for acts done "while he is a partner" — a person is not liable for acts of the firm done before he joined or after he left. But the qualification on retirement and dissolution is important: a retiring partner, or a partner in a dissolved firm, may continue to be liable to third parties who deal with the firm without notice of the change, until public notice of the retirement or dissolution is given. This is where the liability rules of Section 25 interlock with the doctrine of holding out in Section 28.

Implied authority — Section 19

Section 19(1) provides that, subject to Section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this provision is his "implied authority." It is so called because it arises by implication of law as a legal incident of the formation of a firm; it need not be expressly conferred. For an act to fall within the implied authority, two conditions must be satisfied: the act must relate to the normal business of the firm, and it must be done in the usual way of carrying on that business.

The scope of implied authority is therefore fixed by the nature of the business. What is usual for one kind of firm may be wholly outside the authority of a partner in another. In a firm of sugar merchants, the purchase and sale of sugar is within the implied authority of any partner, but accepting deposits is not; in a firm of bankers, accepting deposits and dealing in negotiable instruments is within authority, but purchasing sugar is not. The courts have long drawn a distinction between trading and non-trading firms, the implied authority of a partner in a trading firm — to borrow money, draw and accept bills, pledge goods — being markedly wider.

In Saremal Punamchand v. Punamchand, a firm dealt in brass and copper utensils. Two partners borrowed money for the partnership business; the others resisted on the ground that borrowing was neither necessary nor usual. The court held that, the partnership being of a commercial (trading) nature, there was an implied authority to borrow money, and the firm was bound. The English decision in Mercantile Credit Co. Ltd v. Garrod (1962) 3 All ER 1103 illustrates how the test focuses on appearances: in a garage partnership whose deed excluded the buying and selling of cars, one partner sold a car to which the firm had no title; the firm was held liable because selling a car is the kind of act done in the ordinary course of a garage business, and that is what was apparent to the outside world.

Statutory restrictions — Section 19(2)

Section 19(2) cuts back the implied authority by listing acts that a partner cannot, in the absence of any usage or custom of trade to the contrary, do so as to bind the firm. These statutory restrictions are binding on everyone dealing with a firm; a third party cannot plead ignorance of them. In the absence of an express authorisation, the implied authority of a partner does not empower him to:

1. submit a dispute relating to the business of the firm to arbitration;
2. open a banking account on behalf of the firm in his own name;
3. compromise or relinquish any claim or portion of a claim by the firm;
4. withdraw a suit or proceeding filed on behalf of the firm;
5. admit any liability in a suit or proceeding against the firm;
6. acquire immovable property on behalf of the firm;
7. transfer immovable property belonging to the firm; and
8. enter into partnership on behalf of the firm.

The rationale is that these are acts of an unusual and serious character, going beyond the ordinary running of the business, which a third party ought not to assume a single partner can do alone. A partner does have implied authority to receive payment on behalf of the firm and give a valid discharge; but he cannot, for instance, set off a debt due to the firm against his own personal debt to the third party — as held in Dalichand v. Mathura Das, AIR 1958 Bom 428, the receipt of money due to the firm by way of set-off against a partner's private debt is outside the implied authority and does not bind the firm.

Mode of acting and extension — Sections 22 and 20

Section 19(1) is expressly made "subject to Section 22." Section 22 prescribes the manner in which a partner must act to bind the firm: in order to bind the firm, an act or instrument done or executed by a partner or other person on behalf of the firm must be done or executed in the firm name, or in any manner expressing or implying an intention to bind the firm. An act done in a partner's own name, without anything to show that he meant to act for the firm, will not by itself bind the firm.

Section 20 deals with the extension and restriction of implied authority by agreement. The partners may, by contract among themselves, extend a partner's authority beyond what the law implies, or restrict it below that level. An extension is unproblematic so far as third parties are concerned — an act within the extended authority binds the firm. A restriction is more delicate. The crucial rule in Section 20 is that, notwithstanding any such restriction, an act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the third party knows of the restriction, or does not know or believe him to be a partner.

This is the difference between statutory restrictions and contractual ones. The statutory restrictions in Section 19(2) bind all third parties, whether or not they have notice. A restriction imposed under Section 20 by private contract binds a third party only if he had actual knowledge of it. The point was settled in Moti Lal Manucha v. Unao Commercial Bank Ltd (1930): the partnership deed restricted the partners' power to borrow money; a partner borrowed and accepted a bill of exchange; because the third party did not know of the restriction, the firm was held liable. Conversely, in Prembhai v. Brown (1873) 10 Bom HC Rep 319, where a partner's authority to draw bills was capped and the third party knew of the cap, the firm was not bound by promissory notes drawn beyond it.

Emergency, admissions and notice — Sections 21, 23, 24

Section 21 supplies an authority in 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. This is a partner-specific echo of the agent's authority in emergency under the Indian Contract Act. The act need not fall within ordinary implied authority — the test is what a prudent person would do to avert loss to the firm.

Section 23 governs the effect of admissions and representations: 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. The principle follows from agency — what an agent admits in the course of the agency binds the principal. An admission by one partner about a contract, a document, or the firm's financial position will be evidence against the others. But the admission is only evidence, not conclusive proof; it can be rebutted. And it must be made in the ordinary course of business — a partner cannot, by Section 19(2)(e), admit liability in a suit against the firm.

Section 24 deals with notice to an 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. Again the rule is borrowed from agency: notice to the agent is notice to the principal. The notice must be actual, not constructive, and the fraud exception prevents a guilty partner's knowledge being attributed to the firm to its prejudice.

Wrongful acts and misapplication — Sections 26 and 27

So far the liability discussed has been contractual. Sections 26 and 27 extend the firm's liability to wrongs. Section 26 provides that where, by the wrongful act or omission of a partner acting in the ordinary course of the business of the firm, or with the authority of his partners, loss or injury is caused to a third party, or a penalty is incurred, the firm is liable therefor to the same extent as the partner. The firm is thus vicariously liable for the torts of a partner committed in the course of the firm's business — fraud, negligence, conversion and the like.

Section 27 deals specifically with misapplication of money or property. It covers two situations. First, where a partner, acting within his apparent authority, receives money or property from a third party and misapplies it. Second, where a firm, in the course of its business, receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm. In both cases the firm is liable to make good the loss. The expression "apparent authority" in clause (a) means the authority as it appears to others; it may be wider than implied authority, though the two largely coincide because both depend on the usual manner of carrying on the business.

The classic illustration is the English decision in Lloyd v. Grace, Smith & Co. [1912] AC 716. A widow entrusted her title deeds to a firm of solicitors, dealing with the managing clerk whom she believed to be a partner; the clerk fraudulently got her to transfer the property to him and misappropriated it. The House of Lords held the firm liable, because conveyancing was part of the ordinary business of solicitors and the fraud was committed within the apparent scope of the clerk's authority. The principle — a principal answers for a fraud committed by its agent within the apparent scope of the agency, even where the principal derives no benefit — is the foundation of Section 27.

Doctrine of holding out — Section 28

Ordinarily a person who is not a partner cannot be made liable for the acts of the firm. The doctrine of holding out under Section 28 is the exception. A person who is not a partner may nonetheless be made liable as one if he has held himself out, or knowingly allowed himself to be held out, as a partner, and a third party has on the faith of that representation given credit to the firm. The basis of the liability is not partnership in fact but the law of estoppel: having induced the third party to act on the representation, the person held out is estopped from denying that he is a partner.

Two elements must be established. First, a representation — express or implied — by the person sought to be charged, that he is a partner; or his knowing permission of such a representation by another. The representation may be made by allowing one's name to appear on the firm's signboard, letterhead, name or correspondence; but there must be some voluntary act or assent. Second, the giving of credit by the plaintiff on the faith of the representation. If the plaintiff never heard of the representation, or did not believe it, or knew the truth, or would have given credit anyway, no liability by holding out arises, because he was not in fact misled.

The two elements are illustrated by contrasting cases. In Oriental Bank v. S.R. Kishore, AIR 1992 Del 174, where there were the defendant's signatures on essential documents and all-round participation in the business, he was held liable by holding out — the mere fact that a firm bears a name (Ram Dayal Gur Dayal) does not by itself prove that the named person is a partner; positive conduct is required. In the leading English authority Tower Cabinet Co. v. Ingram (1949) 1 All ER 1033, a partner (Ingram) had retired and the business was continued by the other (Christmas), who used old notepaper bearing Ingram's name without his knowledge to order goods. Ingram was held not liable: mere negligence in failing to ensure the old notepaper was destroyed is not a "knowing" permission to be represented as a partner.

Limits of the holding-out doctrine

The doctrine has several limits. It does not apply where the basis of the action is the tort of a partner rather than credit given to the firm. There can be no holding out through registration, because a person registered as a partner is in fact a partner. By the express terms of Section 28(2), the continued use of a deceased partner's name in the firm name does not make his legal representatives or his estate liable for acts of the firm done after his death. Holding out also does not arise against an insolvent partner — insolvency terminates his liability — nor against a dormant or sleeping partner, whose membership was never known to the public and whose exit therefore needs no public notice.

The position of a retiring or expelled partner is the mirror image. Because his membership was known to the world, his exit must be publicised by public notice; otherwise he may continue to be held liable on the principle of holding out to those who deal with the firm without notice of his retirement. The classic authority is Scarf v. Jardine (1882) 7 App Cas 345: a retiring partner who gives no public notice may be held liable to an old customer who, without notice of the retirement, continues to supply the firm — though the House of Lords held that the creditor, having elected to sue the reconstituted firm, could not afterwards sue the retired partner, the liability of the latter being one of estoppel and in the alternative, not joint with the new firm.

An important corollary: the apparent partner does not thereby become a real partner. He acquires no rights against the firm or its members, and no agency is created between him and the real partners — so the real partners are not liable for his acts unless they too held him out or connived at the holding out. The effect of the doctrine, in the old formulation, is that "persons may be partners as towards the world without being partners between themselves."

Transferee of a partner's interest — Section 29

Partnership rests on mutual confidence, so no outsider can be forced into the firm as a partner without the consent of all the existing partners. A partner may, however, transfer his own interest in the firm — by sale, mortgage or charge. Section 29 fixes the limited rights such a transferee acquires. During the continuance of the firm, the transfer does not entitle the transferee to interfere in the conduct of the business, to require accounts, or to inspect the books of the firm; it entitles him only to receive the share of profits of the transferring partner, and he must accept the account of profits agreed to by the partners.

The transferee does not become a partner. The transferor remains the partner, with all his rights and duties intact; the transferee merely steps into the right to receive that partner's share of profits, taking it as the partners have settled it. The reason for excluding the transferee from management and from the books is, again, the confidential character of the relationship — an outsider should not be let into the secrets of the firm.

The position changes on dissolution or on the transferring partner ceasing to be a partner. Under Section 29(2), the transferee is then entitled, as against the remaining partners, to receive the share of the assets to which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution. The "share" of a partner means his proportion of the partnership assets after they have been realised and converted into money and after all the firm's debts and liabilities have been paid and discharged.

Position of a minor — Section 30

Partnership arises from contract, and a minor is incompetent to contract; so a minor cannot be a full partner. There cannot be a partnership of all minors, or of one adult and several minors. A minor is not a partner even if he is described as one in the deed. In CIT v. Dwarkadas Khetan & Co., AIR 1961 SC 680, a deed admitted a minor as a full partner with equal rights and obligations; the Supreme Court held the partnership invalid to that extent and not registrable, because the law of partnership cannot make a minor a full and competent partner. In CIT v. Shah Mohandas Sadhuram, AIR 1966 SC 15, by contrast, a deed admitting two minors only to the benefits of partnership — with no liability for losses — was upheld; a deed must be construed reasonably, and so long as it does not make a minor a full partner it is not invalid merely because a guardian accepts the benefits on the minor's behalf.

Section 30(1) provides the route: "A minor may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership." Two prerequisites follow — there must be an existing firm, and all the partners must consent. The consent may be express or implied, by acquiescence or conduct; allotment of a share or distribution of profits to a minor is indicative of admission. But mere help rendered by a minor in a family business is not enough, as held in Official Assignee, Madras v. Palaniappa Chettiar (1918) ILR 41 Mad 824.

The rights and liabilities of a minor so admitted are carefully calibrated. Under Section 30(2), he has a right to such share of the property and profits of the firm as may be agreed, and he may have access to, inspect and copy the firm's accounts — but only the accounts, not the other books and papers, lest an outsider learn the firm's secrets. Under Section 30(3), he is not personally liable for the debts and obligations of the firm; only his share in the property and profits is liable. Under Section 30(4), he cannot sue the partners for an account or for his share except when severing his connection with the firm; and if he does so sue, the other partners may elect to dissolve the firm, in which case the court proceeds as in a suit for dissolution.

The minor attaining majority

The pivotal moment is the attainment of majority. Under Section 30(5), at any time within six months of attaining majority, or of obtaining knowledge that he had been admitted to the benefits of partnership — whichever date is later — the minor may elect, by public notice, to become or not to become a partner. If he gives no such public notice, there is a presumption that he has elected to become a partner, and on the expiry of the six months he becomes a partner in the firm. Public notice is therefore needed only when he wishes to quit. During the six months, his position remains that of a minor admitted to benefits, without personal liability — and that protection survives even where a suit is decided after the six-month period has expired, as in Kunhacheummu v. Chalapuram Bank, AIR 1958 Ker 318.

The consequences of the election are spelt out in Section 30(7) and (8). If the minor becomes a partner, Section 30(7) provides that his rights and liabilities as a minor continue up to the date he becomes a partner, but he becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership — retrospectively, from the date of admission, not merely from the date of majority. Election to become a partner thus operates as an automatic ratification of all the firm's acts since his admission. If the minor elects not to become a partner, Section 30(8) provides that his rights and liabilities continue to be those of a minor up to the date of the public notice; his share is not liable for any acts of the firm done after that date; and he may sue the partners for his share of the property and profits.

Finally, Section 30(9) provides that nothing in sub-sections (7) and (8) affects the provisions of Section 28. The cessation of a minor's liability on electing out does not displace the doctrine of holding out. If, after attaining majority and giving notice that he is not a partner, the former minor nonetheless represents himself, or knowingly permits himself to be represented, as a partner, holding-out liability under Section 28 will still arise towards anyone who gives credit to the firm on the faith of that representation. The minor's statutory shield protects only the honest exit, not a later misrepresentation.

MCQ angle — recurring distinctions

Several propositions recur in prelims. First, the eight statutory restrictions in Section 19(2) are a closed list to memorise — arbitration, bank account in own name, compromise, withdrawal of suit, admission of liability, acquisition and transfer of immovable property, and entering into partnership. Second, the distinction between Section 19(2) restrictions (bind all third parties regardless of notice) and Section 20 restrictions (bind only a third party with actual knowledge), tested through Moti Lal Manucha and Prembhai v. Brown. Third, the two ingredients of holding out under Section 28 — representation plus credit given on its faith — and the negative authority of Tower Cabinet Co. v. Ingram on mere negligence.

Two further distinctions are worth carrying forward. The minor under Section 30 is admitted only to the benefits, is not personally liable (only his share), and may inspect only the accounts; on majority he has a six-month window and is deemed a partner if silent. And the transferee under Section 29 gets only the profit share during the firm's continuance and the asset share on dissolution — never management, accounts or inspection. These calibrated, limited positions, set against the unlimited joint-and-several liability of a full partner under Section 25, are the heart of the chapter. Read alongside the essential tests of partnership, they complete the picture of how a firm faces the outside world.