Relation of Partners to Third Parties under Partnership Act
Relation of Partners to Third Parties under the Partnership Act
Introduction
In a partnership, partners act both among themselves and in relation to third parties. The Partnership Act defines the rights, duties, and liabilities of partners, especially concerning dealings with outsiders (third parties). Understanding these relations is crucial because partners bind the firm and each other in business transactions.
1. Partners’ Authority to Bind the Firm
Actual Authority
Every partner is an agent of the firm and has the power to bind the firm and other partners by acts done in the ordinary course of business.
This means if a partner enters into contracts or agreements related to the business, the firm is bound by those acts.
Case Example:
Mercantile Credit Co. Ltd. v. Garrod (1962)
The court held that a partner acting in the ordinary course of business binds the firm even if the other partners are unaware of the specific transaction.
Apparent Authority
Even if a partner acts outside their actual authority, the firm may still be bound if the third party reasonably believes the partner has authority (based on past dealings or the partner’s position).
This protects third parties dealing in good faith.
2. Liability of Partners to Third Parties
All partners are jointly and severally liable for the acts of the firm.
If a partner contracts with a third party on behalf of the firm, all partners are liable to the third party for the firm’s obligations.
This means the third party can sue any one partner or all partners together.
Case Example:
Salomon v. Salomon & Co. Ltd. (not a partnership case but explains the principle of liability in business)
In partnerships, liability extends to all partners for firm debts, unlike companies where limited liability applies.
3. Liability of Third Parties to Partners
Third parties dealing with the firm must fulfill their obligations to the firm or any partner acting on behalf of the firm.
If a third party fails to honor contracts with the firm, any partner can sue for breach.
4. Incoming and Outgoing Partners’ Relation to Third Parties
Incoming Partner:
Not liable for firm debts incurred before becoming a partner.
Outgoing Partner:
Remains liable for debts or acts done before they left, but not for new liabilities after retirement, unless the third party is unaware of their retirement.
5. Partnership Firm’s Liability for Partner’s Personal Acts
The firm is liable only for acts done in the course of partnership business.
Personal acts of a partner outside partnership business do not bind the firm.
Case Example:
Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964)
The firm was not liable for acts outside the scope of partnership business.
Summary Table
| Aspect | Explanation | Case Law Example |
|---|---|---|
| Partner’s authority to bind firm | Partners act as agents and bind firm in ordinary business | Mercantile Credit Co. Ltd. v. Garrod |
| Liability to third parties | Partners jointly and severally liable for firm’s obligations | (General principle in partnership law) |
| Incoming partner liability | Not liable for past debts | |
| Outgoing partner liability | Liable for prior debts until third party notified of retirement | |
| Firm’s liability for acts | Only liable for acts in partnership business | Freeman & Lockyer v. Buckhurst Park Properties |
Conclusion
Partners have a fiduciary and legal duty towards third parties. They act as agents of the firm, binding it by their acts within authority. All partners share liability for firm obligations to third parties, ensuring trust and reliability in commercial transactions. The law balances protecting third parties and respecting internal partnership dynamics.
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