Relations of Partners with Third Parties under the Partnership Act

Understand Relations of Partners with Third Parties

Key rules to remember

Partner as agent

Partner = agent of the firm for the purposes of the firm's business (Section 18)

This is the starting point. The firm is bound only through acts of partners as agents.

Implied authority

Act done to carry on, in the usual way, business of the kind the firm carries on → binds the firm (Section 19(1))

Two tests: the act must be for the firm's kind of business and done in the usual way.

Acts outside implied authority

No implied power to: arbitrate; open bank account in own name; compromise or relinquish claim; withdraw suit; admit liability in suit; acquire or transfer immovable property; enter partnership for the firm (Section 19(2))

This applies in the absence of a contrary usage or custom of trade. Remember it as a list of eight.

Restriction of authority

Restriction binds the outsider only if he knows of it, or does not know or believe the person to be a partner (Section 20)

An internal restriction alone does not free the firm from an act within implied authority.

Emergency

Acts of ordinary prudence to protect the firm from loss bind the firm (Section 21)

The purpose must be protecting the firm from loss.

Liability of partners

Every partner is liable jointly with the others and also severally for all acts of the firm done while he is a partner (Section 25)

A creditor may sue one partner for the whole amount. That partner can then claim contribution from the others.

Wrongful acts

Firm liable to the same extent as the partner, if the wrong was in the ordinary course of business or with partners' authority (Section 26)

This covers loss or injury to a third party and also penalties incurred.

Misapplication

Firm must make good the loss if (a) a partner within apparent authority receives money or property and misapplies it, or (b) the firm receives it in the course of business and a partner misapplies it while in the firm's custody (Section 27)

Two limbs. Name the limb that fits the facts.

Retirement and notice

Retired partner and the partners remain liable to third parties until public notice of retirement (Section 32(3)); a retired partner is not liable to one who dealt with the firm without knowing he was a partner

The notice may be given by the retired partner or any partner of the reconstituted firm.

After dissolution

Partners remain liable for acts that would have been acts of the firm until public notice of dissolution (Section 45(1)); authority continues only as necessary to wind up and complete unfinished transactions (Section 47)

Under Section 45(1), the estate of a deceased or insolvent partner is not liable for later acts. Nor is a retired partner who was not known to the dealer to be a partner.

How to solve Relations of Partners with Third Parties questions

1. 1Identify the parties: the firm, the acting partner, the other partners and the third party. Note whether the person is really a partner.
2. 2State the rule: a partner is the agent of the firm (Section 18) and implied authority binds the firm under Section 19(1).
3. 3Test the act: is it of the kind the firm does, and done in the usual way? Check whether it falls in the Section 19(2) list.
4. 4Check for a restriction among the partners. Apply Section 20: did the third party know of it, or not know or believe the person to be a partner?
5. 5If it is a wrong or misapplication, apply Section 26 or 27. If it is a debt or contract, apply Section 25 on joint and several liability.
6. 6Check timing: was the person a partner when the act was done? Look for retirement or dissolution and whether public notice was given (Sections 32 and 45).
7. 7Conclude clearly: who is liable, to what extent, and who may claim contribution from whom.

Quickest way: Four-question check

Common mistakes in Relations of Partners with Third Parties

• Saying a restriction among partners always frees the firm.

  Students read the restriction clause and stop.

  Fix: Add the second half of Section 20. The firm is still bound for an act within implied authority unless the outsider knew of the restriction or did not know or believe that person to be a partner.

• Writing that a partner can never do the acts in Section 19(2).

  The list is remembered as a ban.

  Fix: Say implied authority does not extend to them, in the absence of a contrary usage or custom of trade. Partners can grant such power by agreement.

• Treating joint and several liability as liability only in proportion to profit share.

  Students mix liability to outsiders with sharing among partners.

  Fix: Each partner is liable for all acts of the firm. The creditor can proceed against any partner for the whole amount. Contribution among partners is a separate matter.

• Ignoring public notice when a partner has retired.

  Students assume retirement ends liability immediately.

  Fix: Under Section 32(3), liability to third parties continues until public notice, except to those who dealt without knowing he was a partner.

• Making the firm liable for any wrong of a partner.

  Students overlook the condition in Section 26.

  Fix: State that the wrong must be in the ordinary course of the firm's business or with the partners' authority. A personal wrong outside that is not the firm's.

• Mixing up Section 26 with Section 27.

  Both deal with partners' wrongful conduct.

  Fix: Section 26 covers loss, injury or penalty caused to a third party. Section 27 covers money or property received from a third party and misapplied.

Worked examples