Agency of Partners I
Each partner is the agent of the other partners in relation to matters within the scope of the partnership. The acts of a partner in the course of business are those of the firm. They are legally binding on the other partners unless a third party is actually aware of the specific absence of authority in the circumstances.
The partner’s authority applies to acts and contracts done or made in the normal course of the partnership business. The activity or transaction must be one which is usual for the particular partnership business. It must relate to that business. It must be made by the partner in his capacity as such, rather than personally.
Agency of Partners II
The partnership agreement may set out the authority of the partners. However, a partner may be held out as having authority by his fellow partners, whether they so intend or not and whether or not he, in fact, has been conferred with the requisite authority.
A third party dealing with the partner, who has no knowledge of actual limitations on the partner’s power or authority, is entitled to assume that he has authority to enter agreements on the partnership’s behalf. The partnership is deemed to have held out the partner as having the authority to make a contract within the scope of the partnership business.
Acts or documents relating to the partnership business, done in the firm’s name or done in a manner showing an intention of binding the firm by any person authorised by the partners, whether a partner or not, are binding on it.
Where a third party dealing with the partner, has or should have knowledge or notice of the restriction or limitation on authority, the partnership will not be bound. A third party may have notice by reason of the particular circumstances. A transaction which is patently for a partner’s private benefit and not for the benefit of the partnership is unlikely to bind the other partners.
Where a partner enters a transaction, which is not connected with the firm’s ordinary business, the partnership will not be bound. If for example, a partner purports to sell all partnership assets, this would be unlikely to be within the terms of his implied authority. In contrast, a sale of partnership stock is more likely to be made in the normal course of the partnership business.
The act or contract must be within the scope of the firm’s ordinary business, in order to be binding on it. It is an objective test as to whether an action or matter is within the scope of the partnership’s ordinary business.
The act must be done by a partner in his capacity as such. It must be done on behalf of the partnership. If it is done on behalf of another entity, the partners are not bound. An act may be done on behalf of the partnership even if it is outside the powers of the partnership, provided that it is within the ordinary course of business.
A partner’s authority terminates upon dissolution of the partnership. He may continue to have apparent authority.
Extraordinary Business I
The particular status of the partner within the firm does not necessarily determine the limits of his authority. A junior partner may bind a senior partner in relation to transactions in the ordinary course of business. A silent or dormant partner may bind other partners if he has or is held out as having the requisite authority.
The nature and context of the transaction will determine whether a contract, act or matter is within the scope of the ordinary business of the company such that it would be usual for a single partner to have the requisite authority. Common sense may point to a particular conclusion.
Extraordinary Business II
There are certain types of acts and transactions, for which a single partner would not generally have authority to bind the partnership. These are likely to include the following:
- granting a power of attorney;
- undertaking a transaction which must be by deed, e.g., property sales;
- granting guarantees (in the absence of practice to the contrary);
- engaging in another business;
- commencing legal proceedings; and,
- entering arbitration agreements.
Types of Authority
An act may be within the actual, implied or apparent authority of the partner or another representative of the firm. An act may be within the actual authority of a partner by the terms of the partnership agreement. Actual authority may be conferred under the partnership agreement, on a partner or another, for example by a decision of a management committee.
Partnership agreements do not need to set out in detail, the acts which are within the scope of a partner’s authority. The scope of the partner’s authority will be implied to a large extent, from the circumstances. Many acts will be within the scope of a partner’s authority by implication. The position may be determined by the nature of the partner’s role.
Under the Partnership Act, each partner has authority to do that which is in the ordinary scope of the partnership business. The provision codifies the common law principles of implied and ostensible authority to some extent.
Whether or not an act is within the ordinary scope of the partnership business, depends on the nature of the business carried on. The ordinary business is that of the partnership not that of the individual’s partners.
The authority of partners under the Partnership Act reflects and overlaps common law principles of ostensible / apparent authority. In this context, ostensible authority refers to authority which has not been expressly or impliedly conferred, but which the partners (as a whole) give third parties the impression and understanding that he has. Ostensible authority may be conferred on partners or any other person, for example, an employee
Ostensible authority arises when a representation is made that a particular act or matter is authorised by the partnership. The fact that a third party believes the partner or other person has the relevant authority is not enough. There must be some kind of representation or holding out by the partners as a whole.
The representation may be by words or conduct. It may be by act or omission. Where a person is, in fact, a partner, relatively little holding out would be required to confer ostensible authority.
Where there are, in fact, restrictions on a partners’ authority, and these are not known to the third party, the partnership is bound to that third party, notwithstanding the breach of the restriction. Conversely, where the third party is aware of the restriction or limitation on authority, the partners are not bound.
Even if an act is done which exceeds or is outside the scope of the partner’s or other person’s authority, it may be later adopted or ratified by the partners. The partners or other partners must have knowledge of the act being ratified. Ratification makes the act binding on them, retrospectively.
The ratified act must be valid. A void contract is a nullity and cannot be ratified. The ratification must take place within a reasonable time. The partners must be aware of the relevant facts. The agent must have purported to have acted on behalf of the firm.
Where ratification takes place, it cures any previous defect in authority. It may also follow that the agent is entitled to remuneration, to which he might not otherwise have been entitled.
The Statutes of Fraud Act, 1828 provides that a partnership is not liable for false representations regarding the character or solvency of another unless the representation is in writing and signed by all the partners. The provision does not apply to negligent references.
The signature on a cheque or bill of exchange is binding on the firm if it is signed in the firm name by a partner in the ordinary course of business.
The authority to sign and deliver a deed on behalf of the partnership must be given expressly. This is generally done by power of attorney. A power of attorney must be in writing and must be witnessed. It need no longer be given under seal.
Partner by Holding Out
The possibility of being a partner by “holding out” arises from principles of estoppel, as codified in the Partnership Act. Under these principles, if a person holds himself out or acts in a particular way so that another acts to his detriment in reliance on this apparent position, then he may not deny the role or position he holds himself out as having.
Where a third party extends credit to a firm in reliance on a person holding himself out or representing that he is a partner, that person may be liable as if he was a partner. The person concerned may hold himself out or knowingly allow another to hold him out.
The third party may make the apparent partner liable if he relies on his being a partner and extends credit to the firm. If the third party, in fact, knows that the person is not a partner, this provision will not apply.
Where a person was formerly a partner and continues to be held out as a partner, he will be more readily held to be liable to outsiders as a partner. Where a person deals with a firm after a change in its makeup, he may treat all apparent members of the old firm as partners, until he has notice of the change.
In the case of a former partner, the third party need not prove that he actually relied on the person being a partner, if he relied on the credit and standing of the firm while that person was a partner.
A partnership requires the sharing of profits.A person who receives payments out of profits which are labelled as a salary may be nonetheless a partner. A person labelled as a partner who does not receive a share of profits but who is paid a salary is often called a “salaried” partner, but is not, in fact, a partner.
A salaried partner runs the risk of being held liable to third parties as if he is a partner, because he is held out as a partner. He may be estopped from denying that he is a partner.
In order to be a partner by holding out such, the salaried partner must be aware of the holding out and must permit it to happen. A person who is held out as a partner should take steps to correct the impression if he wishes to avoid the risk of being held liable as a partner. He must generally act within a reasonable time, in order to dispel the impression that he is a partner.
If a negligent or wrongful act or omission takes place in the ordinary course of business, the partners are bound and are liable to third parties for the consequences. They may be liable under principles of agency and vicarious liability.
Where a wrongful act or omission of a partner, acting in the ordinary course of a business or with the authority of his fellow partners, causes loss of injury to another, the firm is liable to the same extent as the partner so acting or appearing to act.
Partners are liable for the strict liability, negligent and intentional civil wrongs of their fellow partners within the scope and course of the partnership business. Acts may be nonetheless, within the ordinary course of business of the partnership, even though they may be wrongful or negligent. The principle covers acts or omissions.
Where a partner, acting within the scope of his apparent authority receives money or property belonging to a third party, whether under a trust or otherwise, and misapplies it, the firm is liable to the persons entitled, for the misapplied or misappropriated of monies. Similarly, the firm is liable for the monies or property which are received in the course of its business and later misapplied or misappropriated.
A partner who does not have notice of a breach of trust or misappropriation of another’s money or property by a fellow partner is not personally liable. The misappropriation is not in the ordinary course of the partnership business.
A partner who has actual notice of a breach of trust is personally liable. He may be criminally liable as an accessory. Knowledge will not be readily imputed to a fellow trustee.
If a partner improperly uses trust money in the business or for the account of the partnership, it may be followed and recovered from the firm if it is still in its possession or under its control.
Where a partner makes an admission or representation relating to partnership affairs in the ordinary course of the partnership business, this is evidence against the partnership. It can be used as evidence against the firm in civil proceedings. The admission in evidence is not necessarily conclusive.
References and Sources
Partnership Act, 1890
Partnership Law 2000 Twomey M. Butterworths
Lindley & Banks on Partnership: (19th Revised edition) 2016 Banks, Roderick I’Anson
Partnership & Llp Law (8th edition) 2015 Morse, G.
Partnership Law (5th Revised edition) 2015 Blackett-Ord, Mark; Haren, Sarah;
Power of partner to bind the firm.
5. Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.
Partners bound by acts on behalf of firm
6. An act or instrument relating to the business of the firm done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners.
Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments.
Partner using credit of firm for private purposes.
7. Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.
Effect of notice that firm will not be bound by acts of partner.
8. If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.
Liability of partners.
9. Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied, but subject in England or Ireland to the prior payment of his separate debts.
Liability of the firm for wrongs.
10. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.
Misapplication of money or property received for or in custody of the firm.
11. In the following cases; namely—
(a) Where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it; and
(b) Where a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm;
the firm is liable to make good the loss.
Liability for wrongs joint and several.
12. Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the two last preceding sections.
Improper employment of trust-property for partnership purposes.
13. If a partner, being a trustee, improperly employs trust-property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein:
Provided as follows:—
(1) This section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust; and
(2) Nothing in this section shall prevent trust money from being followed and recovered from the firm if still in its possession or under its control.
Persons liable by “holding out.”
14.—(1) Every one who by words spoken or written or by conduct represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to any one who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.
(2) Provided that where after a partner’s death the partnership business is continued in the old firm’s name, the continued use of that name or of the deceased partner’s name as part thereof shall not of itself make his executors or administrators estate or effects liable for any partnership debts contracted after his death.
Admissions and representations of partners.
15. An admission or representation made by any partner concerning the partnership affairs, and in the ordinary course of its business, is evidence against the firm.
Notice to acting partner to be notice to the firm.
16. Notice to any partner who habitually acts in the partnership business of any matter relating to partnership affairs 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.
Liabilities of incoming and outgoing partners.
17.—(1) A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.
(2) A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement.
(3) A retiring partner may be discharged from any existing liabilities, by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.
Revocation of continuing guaranty by change in firm.
18. A continuing guaranty or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transactions of which, the guaranty or obligation was given.