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ACCA Applied Skills · Corporate and Business Law (Global) · Partnerships

Dara and Eli are partners in a catering firm. They agreed between themselves that Eli must not borrow money for the firm. Eli borrows 20,000 from Fenwick Bank for the firm's working capital, a normal act for such a firm. Fenwick Bank knew nothing of the restriction. What is the position?

The firm is bound. A private restriction on a partner's authority does not bind a third party who has no knowledge of it, and borrowing for working capital is an ordinary act, so Dara is liable alongside Eli, with internal recourse against Eli.

  1. AThe firm is bound, because the restriction does not affect a third party without notice of itCorrect
  2. BThe firm is not bound, because the partnership agreement overrides third party rights
  3. COnly Eli is liable, because Dara had expressly forbidden borrowing

Explanation

A restriction on a partner's authority is effective against outsiders only if they know of it. Fenwick Bank had no notice and the borrowing was usual for the business, so the firm is bound. Dara may seek an indemnity from Eli internally for breach of the agreement.

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