Rights and Duties of Partners →

Chapter III of the Indian Partnership Act, 1932 — Sections 9 to 17 — governs the relations of partners to one another, the mutual rights and duties that bind them inter se. The architecture is deliberately two-tiered. Some obligations flow from the very nature of the relationship and cannot be bargained away; others are default rules that hold the field only until the partners agree otherwise. The governing premise of Section 11 is freedom of contract: partners should, so far as possible, arrange their own affairs. But that freedom operates against a fiduciary floor — the duty of utmost good faith in Section 9 and the duty to indemnify the firm for fraud in Section 10 are not negotiable, because a partnership without trust is no partnership at all.

This chapter sets out the statutory scheme, the line between mandatory duties and contract-displaceable defaults, the seven duties distilled from Sections 9, 10, 12, 13, 15 and 16, the eight rights gathered in Sections 12 and 13, the definition of partnership property in Section 14, and the rule in Section 17 on the continuance of rights and duties after a change in the firm. It assumes the groundwork laid in our chapters on the introduction, scheme and definitions and the nature of partnership and its essential tests.

Statutory scheme — Chapter III

Chapter III, headed "Relations of Partners to one another," contains Sections 9 to 17. It is to be read against the agency premise that runs through the whole Act — every partner is at once a principal and an agent of the firm, and the law of partnership has been described as a branch of the law of agency. Within the firm, that agency is tempered by a fiduciary relationship of the highest order; between the firm and the outside world, it becomes the doctrine of implied authority and mutual liability examined in the chapters on relations to third parties.

The provisions divide cleanly. Section 9 lays down the general duties; Section 10 the duty to indemnify for fraud; Section 11 the master rule of freedom of contract; Sections 12 and 13 the bundle of rights and the mutual rights and liabilities; Section 14 the definition of partnership property; Section 15 the duty to use that property for the firm; Section 16 the duty not to make personal profits or to compete; and Section 17 the continuance of these rights and duties after a change in the firm. The distinction between partnership and cognate relationships such as co-ownership and the Hindu undivided family — drawn out in our chapter on partnership versus co-ownership, HUF, company and club — matters here because it is the mutual agency and the fiduciary bond, not mere joint ownership, that generate these rights and duties.

Section 11 — freedom of contract and its limits

Section 11(1) provides that, subject to the provisions of the Act, the mutual rights and duties of the partners are determined by contract between them, and such contract may be express or may be implied by a course of dealing. This is the most important single principle of partnership law: partners should be free to settle their own bargain — who contributes capital or labour, in what profit-sharing ratio, on what terms — and they may vary that bargain at any time by the consent of all.

But the freedom is bounded. Section 9 contains duties by which all partners are bound and which cannot be negatived by contract. By contrast, Sections 12 to 17 are each expressed to operate "subject to contract between the partners" — they are default rules to be implied in every partnership unless displaced by a contrary agreement. The classic illustration is Section 13(b): partners are entitled to share profits equally, but an agreed unequal ratio prevails; the section applies only where the agreement is silent. The drafting lesson is exact: a partnership deed should specify everything the partners want to vary from the default, because what the deed leaves unsaid the Act will supply.

Section 9 — general duties and good faith

Section 9 binds partners to three things: 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. These are the irreducible core of the relationship and cannot be excluded by agreement.

The duty to be just and faithful is the duty of utmost good faith — uberrimae fidei, the same standard that governs a contract of insurance. Partners come together on mutual confidence and trust; that confidence, in the words of Helmore v Smith (1886) 35 Ch D 436, is the life blood of the concern — it is because they trust one another that they are partners in the first place, and because they continue to trust one another that the business goes on. The duty is reciprocal: a partner who complains that the others fail in their duty towards him must himself be ready at all times to do his duty towards them, as Lord Eldon held in Const v Harris (1824) Turn & R 496. Good faith becomes decisive when partners seek to expel one of their number, when one buys out another's share, or whenever a transaction lets one partner gain at the expense of the rest.

The duty to carry on the business to the greatest common advantage forbids a partner from securing an advantage at the firm's expense. The leading illustration is Bentley v Craven (1853) 18 Beav 75: a partner in a firm of sugar refiners, skilled in buying sugar, was entrusted to buy stock for the firm. Instead of buying from the market he supplied his own sugar — bought earlier at a much lower price — at the prevailing market rate, making a secret profit which he did not disclose. The Court of Chancery held that the firm was entitled to recover that profit. It made no difference that the firm paid only the market price and arguably suffered no loss; the vice was the undisclosed personal gain out of a firm transaction. The third limb, the duty to render true accounts and full information, requires every partner to keep and render complete accounts of the partnership moneys in his hands, to spend firm funds only for the firm and keep proper vouchers, and never to mix or misapply them.

Section 10 — duty to indemnify 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. It is another facet of the basic obligation to act honestly towards co-partners and towards those who deal with the firm. Where a partner's fraud causes loss, he alone bears it: he must compensate or indemnify the firm.

Critically, liability for fraud cannot be excluded by any agreement to the contrary. Partners may by contract limit a partner's liability for ordinary loss occasioned by his wrongful act, neglect, want of skill or misconduct, but they cannot contract out of liability for fraud, because it would be opposed to public policy to exempt a person from the consequences of his own fraud. Section 10 therefore stands alongside Section 9 as part of the non-negotiable fiduciary floor of the partnership relationship.

Duty of diligence and wilful neglect

The duty of diligence is shared between two sections. Section 12(b) requires every partner to attend diligently to his duties in the conduct of the business. The complementary indemnity is in Section 13(f): a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business. The pairing is deliberate — diligence is the standard, and wilful neglect is the breach that triggers compensation.

The threshold word is "wilful." A mere inadvertence or accident is not enough; there must be a deliberate, intentional and purposeful act or omission. Awareness that something is being done wrong is good evidence of wilful neglect. The contrast with Section 10 is instructive: fraud is always indemnifiable and cannot be contracted out of, whereas liability for mere negligence may be limited by agreement, and only wilful neglect attracts the statutory indemnity under Section 13(f). The result is a graded scale of fault running from simple negligence, through wilful neglect, to fraud — with the firm's protection strongest at the fraudulent end.

Sections 15 and 16 — property and no secret profit

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 purpose of the business. A firm's property must serve the firm, not the private use of any partner. Although every partner has an interest in the property, no one can deal with any specific item as his own, nor assign his interest in a specific item to a stranger; a partner's right is to his share of the profits from time to time and, on dissolution, to a share in the assets remaining after liabilities are met — the principle settled by the Supreme Court in Addanki Narayanappa v Bhaskara Krishnappa, AIR 1966 SC 1300.

Section 16 is the no-personal-profit and no-competition rule, and it is the sharpest expression of the fiduciary duty. Under Section 16(a), 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. Under Section 16(b), 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 in that competing business. Both limbs are subject to contract, so partners may agree to permit a partner to retain such gains or to carry on an outside business.

The duty flows from the partner's fiduciary and agency character — an agent who makes a profit out of his principal's business must account for it, a principle traceable to Sections 215 and 216 of the Indian Contract Act. The coverage is wide: whatever advantage arises from anything connected with the firm belongs to all the partners, not merely to the partner whose mechanism produced it. A partner who, without his co-partners' knowledge, buys firm property and profits on a resale must account, as on the facts of Bentley v Craven; and accountability is not diluted merely because the gain was made unconsciously. A partner must also account for any benefit obtained from information received within the scope of the partnership business.

Section 14 — property of the firm

Section 14 defines, subject to contract, what constitutes the property of the firm: 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, including the goodwill of the business. Unless a contrary intention appears, property acquired with money belonging to the firm is deemed to have been acquired for the firm.

Because Section 14 is subject to contract, the partners may decide for themselves what they mean to include in the partnership estate, and where their intention is not expressly stated it must be inferred from the facts. The decisive point is intention, not use. The mere use of a partner's property for the firm's business does not make it firm property; it becomes firm property only where there is an indication of an intention to treat it as such. The leading Indian authority is Lachhman Das v Gulab Devi, AIR 1936 All 270, where members of a joint Hindu family partitioned their estate but agreed to continue the family business as a partnership, varying their shares in the business but not their shares in the property. On a partner's death 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; the fact that jointly owned immovable property was used for the partnership business did not make it partnership property. That the shares in the property were left unchanged while the shares in the business were varied, and that the property's value did not appear as a firm asset in the accounts, were strong evidence that the partners did not intend it to be an asset of the firm.

Where property is purchased with the firm's money and in the firm's name, the presumption that it is firm property is strongest; where bought with firm money but in a partner's name, the partner is generally a trustee of it for the firm, and 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. Goodwill — the advantage a business derives from its reputation — is expressly included as firm property, and the benefit of tenancy rights may form part of it.

Section 12 — conduct of the business

Section 12 gathers the rights touching the day-to-day conduct of the business, all subject to contract. Section 12(a) gives every partner the right to take part in the conduct of the business; since the business belongs to all the partners, each is entitled to participate, and the right can be enforced in a court of law. Partners may of course agree that only some of them will manage and others will not — the sleeping or dormant partner is the standard case.

Section 12(c) deals with differences of opinion. Ordinary or routine matters connected with the business may be decided by a majority, provided every partner has first had the opportunity to express his opinion — all partners are entitled to be heard before a decision is taken. But no change may be made in the nature of the business without the consent of all the partners; a matter of fundamental importance, such as admitting a new partner or altering the nature of the business, requires unanimity, and no new business can be undertaken against the will even of a single partner. A vital limit on majority power is that it must be exercised in absolute good faith in the interest of the firm — a majority decision to expel a partner without sufficient cause would be set aside.

Section 12(d) gives every partner the right to have access to, and to inspect and copy, any of the books of the firm. The right extends to all books, not merely account books, and is available to active and dormant partners alike; it may be exercised personally or through an agent engaged for the purpose. Beyond the statute, a partner may seek to restrain a co-partner's misconduct: in Suresh Kumar v Amrit Kumar, AIR 1982 Delhi 131, the Delhi High Court held that a court will restrain a partner from violating the terms of the partnership by acting inconsistently with his duties during the subsistence of the partnership, whether or not dissolution is also sought.

Section 13 — mutual rights and liabilities

Section 13 sets out the financial incidents of partnership, again subject to contract. Section 13(a) provides that a partner is not entitled to remuneration for taking part in the conduct of the business. Partners are owners, and owners are not generally paid for owning; a firm is not the employer of its partners, and any so-called remuneration is in substance a distribution of profits — the point made by the Supreme Court in Keshavji Ravji & Co. v CIT (1990) 2 SCC 231. A salaried or working partner is entitled to remuneration only if the partners so agree.

Section 13(b) provides that the partners are entitled to share equally in the profits earned and shall contribute equally to the losses. Equality is the default whether or not the partners contributed capital equally, brought equal skill, or laboured equally — a partner who alleges unequal shares must prove an agreement to that effect. Where the agreement fixes unequal profit shares but is silent on losses, losses are borne in the same proportion as profits. The right to profits is thus the central economic right of the partner, defeasible only by a contrary bargain.

Right to interest and indemnity

Section 13(c) and (d) govern interest. As a rule no interest is payable on capital, because the partners share the profits; for a partner to claim interest on capital there must be an express agreement, a practice of the particular firm, a trade custom, or a statutory provision. Section 13(c) provides that where the agreement does allow interest on capital, it is payable only out of profits — reflecting the view that interest on capital is in essence a mode of appropriating profits among the partners. Partners may, however, expressly contract for interest regardless of profits.

Section 13(d) is different in kind. Where a partner makes, for the purposes of the business, any payment or advance beyond the amount of capital he agreed to subscribe, he is entitled to interest on it at six per cent per annum. This is a statutory recognition that a partner may be a creditor of the firm as well as a partner in it: such an advance is treated not as an increase of capital but as a loan, like an advance by a third party. The firm is chargeable with interest when the advance is to the firm, not when it is to a co-partner — even where the advance to the partner was made to enable him to complete his own capital contribution.

Section 13(e) confers the right to indemnity. The firm shall indemnify a partner for payments made and liabilities incurred by him in the ordinary and proper conduct of the business, and in doing any act, in an emergency, to protect the firm from loss, of the kind a person of ordinary prudence would do in his own case in similar circumstances. The loss must have been suffered while conducting the firm's business bona fide and within the scope of the partner's authority; where the loss is due to the partner's own improper conduct, he cannot claim indemnity — for instance, a partner who negligently paid the wrong person and had to pay again was refused indemnity. No contribution is recoverable in respect of illegal transactions. The right to indemnity in Section 13(e) is the mirror image of the partner's duty to indemnify the firm for fraud under Section 10 and for wilful neglect under Section 13(f).

Section 17 — continuance after changes

Section 17 addresses what happens to the mutual rights and duties when the firm changes. It contemplates three situations: a change in the constitution of the firm, as where a partner is added or removed; the continuance of the business after the expiry of the term for which the partnership was entered into; and the carrying out by the firm of undertakings other than those for which it was originally formed.

In each case the rule is one of continuity, and in each case it is subject to contract. Where the constitution of the firm changes, the mutual rights and duties of the continuing partners remain, so far as may be, the same as before the change. Where a firm constituted for a fixed term continues after the term expires, the mutual rights and duties remain the same as they were at the expiry, so far as they are consistent with the incidents of a partnership at will — a point developed in our chapter on partnership at will and particular partnership. And where the firm carries out additional undertakings, the rights and duties in respect of the new undertakings are the same as those attaching to the original ones. Section 17 thus prevents a mere change in personnel or scope from silently rewriting the partners' bargain.

Distinguishing rights from duties — the mandatory/default line

The single most testable distinction in Chapter III is between the duties that cannot be contracted out of and the rights and duties that can. The mandatory core comprises the general duties of good faith, greatest common advantage and true accounts in Section 9, and the duty to indemnify the firm for fraud in Section 10. Everything in Sections 12 to 17 is a default — expressly "subject to contract between the partners" — including the right to participate, the rules on majority decision, access to books, the no-remuneration rule, equal profit-sharing, interest on advances, indemnity, the proper use of property, and the no-personal-profit and no-competition duties.

MCQ angle — the recurring distinctions

Several propositions recur in prelims with high frequency. First, the default profit-and-loss rule under Section 13(b) is equal sharing irrespective of unequal capital, skill or labour, displaceable only by a proven agreement. Second, a partner is not entitled to remuneration under Section 13(a) unless the partners agree; partner remuneration is in substance a distribution of profits. Third, the statutory rate of interest on a partner's advance beyond agreed capital under Section 13(d) is six per cent per annum, and such advance is treated as a loan, not as added capital. Fourth, no interest is payable on capital unless the agreement, custom or practice provides for it, and where it is provided under Section 13(c) it is payable only out of profits.

Two further distinctions are worth carrying. The mandatory duties — good faith and greatest common advantage under Section 9, and indemnity for fraud under Section 10 — cannot be excluded by contract, whereas liability for mere negligence can be limited and only wilful neglect attracts the indemnity under Section 13(f). And on partnership property, the test under Section 14 is intention, not use: mere use of a partner's property for the firm does not convert it into firm property, as Lachhman Das v Gulab Devi holds, while a partner has no claim to any specific item of firm property, only to profits and a share of net assets on dissolution, as Addanki Narayanappa holds.

Practical takeaways for the drafter

Three points for anyone settling a partnership deed. First, draft against the defaults: because Sections 12 to 17 yield to contract, the deed should expressly state every term the partners wish to vary — the profit-sharing ratio, any salary to a working partner, interest on capital, restrictions on a partner's authority — since silence hands the matter to the Act. Second, remember what cannot be drafted away: a clause purporting to exclude a partner's liability for his own fraud is void as against public policy, and the duties of good faith and true accounts under Section 9 cannot be contracted out of. Third, treat the property question as one of intention and document it: if partners want a partner's land or premises used by the firm to remain his separate property, the deed and the firm's accounts should say so, because mere use will not, on the authority of Lachhman Das, make it firm property.

The rights and duties of partners are the constitutional law of the firm — they fix the balance between the freedom of the partners to make their own bargain and the fiduciary minimum the law imposes to keep that bargain honest. The next logical step is the firm's relations with the outside world, where the same agency that binds the partners inter se becomes the implied authority that binds the firm to third parties, and where the chapters on the scheme and definitions and the essential tests of partnership supply the foundations. Return to the Indian Partnership Act hub for the full chapter sequence.