Implied Authority of a Partner

In the context of a partnership firm, the authority of a partner means his authority to bind the firm by his acts. This authority may be express or implied. The authority conferred on a partner by mutual agreement is called an express authority. But, where there is no agreement or where the partnership agreement is silent, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm (Section 19). 




This capacity of a partner to bind the firm by his acts is called the ‘implied authority of a partner.’ In order that his act may fall within the scope of his implied authority, the following conditions must be fulfilled.

1. The act done by the partners must relate to the normal business of the firm. If it is of a nature which is not common in the type of business carried on by the firm, it will not bind the firm even if it has been done in the name of the firm. For example, an exporter of readymade garments places an order for a huge quantity of liquor in the name of the firm. As this act does not relate to the normal business of the firm, it will not fall within the scope of implied authority. The firm, therefore, will not be bound by it.

 

2. The act must have been done in the usual way of carrying on the firm’s business. In other words, the act should be such as is usual in the type of business carried on by the firm. For example, X and Y are partners in a retail business. Goods were sold on credit to Z. Later on, X received the amount from him (Z) on behalf of the firm. Y does not know of this receipt and X utilises this amount for his personal use. Receiving money from debtors is an act done in the usual course of business. Hence, the firm cannot claim the amount from Z on the plea that X had no authority to receive the amount. It is difficult to clearly lay down as to what is usual and what is unusual in a business. It will depend on the nature of business and the usage of trade. For example, buying and selling of goods, drawing and accepting bills of exchanges, taking loan, etc, are considered normal activities in case of a trading concern. But, in case of an auctioneering firm or a firm of solicitors, taking loan is not considered to be a usual activity.

 

3. The act must be done in the firm’s name or should, in some manner, imply an intention to bind the firm. For example, A and B are partners in a stationery business. A goes to a wholesaler and buys on credit certain quantity of pencils in the firm’s name. He uses these pencils for the family. Since this act is of the kind usually done in the stationery business and is done in the firm’s name, it will bind the firm.

Act within the implied authority of a partner: The implied authority of a partner shall normally include:

i) purchasing, on behalf of the firm, goods in which the firm deals or which are used in the firm’s business;

ii) selling the goods of the firm;

iii) receiving payment of the debts due to the firm and giving receipt therefore;

iv) settling accounts with third parties dealing with the firm;

v) employing servants necessary for carrying on the firm’s business;

vi) borrowing money in the credit of the firm;

vii) pledging goods of the firm as security for the purpose of getting loans;

viii) drawing, accepting and endorsing negotiable instruments on behalf of the firm; and

ix) employing solicitor to defend action against the firm

 

Acts outside the implied authority of a partner: Sections 19(2) has restricted the scope of implied authority of a partner. According to this section, in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not enable him to:

i) submit to arbitration a dispute relating to the business of the firm;

ii) open a bank account on behalf of the firm in partner’s own name;

iii) compromise or relinquish any claim or portion of the claim by the firm;

iv) withdraw a suit or proceedings filed on behalf of the firm;

v) admit any liability in a suit or proceedings against the firm;

vi) acquire immovable property on behalf of the firm;

vii) transfer immovable property belonging to the firm, and

viii) enter into partnership on behalf of the firm.

However, the partners, by mutual agreement, can restrict or extend the implied authority of a partner.

 

Partner’s authority in an emergency: According to Section 21, in an emergency a partner will have an authority to do all such acts to protect the firm from loss as a prudent man would undertake under similar circumstances in his own case. These acts do not form part of the implied authority of the partner but, nevertheless, they would bind the firm. For example, the partners of a trading firm by an express contract decided that no partner would have the authority to sell goods of the firm above the value of Rs. 10,000 without consulting all other partners. Owing to a sudden slump in market, the prices, crashed. One partner, in order to save the firm from loss, sold all the stock worth Rs. 1,00,000 without consulting any other partner. The firm is bound by such act of the partner.

Implied Authority and Third Parties

All partners are liable to third parties for all acts of a partner which fall within the scope of his express or implied authority. Their liability to the third parties for such acts can be discussed under the following heads.

1. Extension or restriction of partner’s implied authority: As stated earlier, the partners of a firm by mutual agreement, may extend or restrict the scope of implied authority of any partner. But, the third party is not bound by any restriction imposed on the implied authority of a partner unless it has the knowledge of such restriction. In other words, the third party remains unaffected by any secret restriction on the implied authority of any partner.

For example, a trading firm limited the authority of partners to purchase goods on credit up to Rs. 50,000. A third party who had no knowledge of such restriction sold goods worth Rs.1,00,000 on credit to a partner of the firm. The firm is liable to pay the full amount to the third party.

 

2. Effect of admission by a partner: Since, for the purpose of the business of the firm, a partner is an agent of the firm, any admission or representation by a partner about the affairs of the firm is sufficient evidence against the firm, provided the admission is made in the ordinary course of business.

 

3. Effect of notice to an acting partner: You already know that a notice to an agent on matters relating to agency is notice to the principal. The same rule applies to partnership. Thus, a notice of any matter relating to the affairs of the firm, when given to a partner who habitually receives it in the ordinary course of business of the firm, is taken to be a notice to the firm. This rule would not apply in case of a fraud committed by the partners and the third party against the firm.

 

4. Liability of partners for acts of the firm: For all acts of the firm, done while he is a partner, every partner is jointly and severally liable to third parties. This means that for every act of the firm, the third party can sue each partner individually and also jointly with other partners.

 

5. Liability for wrongful acts of a partner: When a partner, in the ordinary course of business, commits a wrongful act, the firm is liable for such an act. Section 26 specifically provides that if on account of the wrongful act or omission of. a partner acting in the ordinary course of business or with the authority of other partners, some loss or injury is caused to any third party or any penalty is incurred, the firm is held liable to the same extent as the partner.

For example, A, B and C are partners in a newspaper business. A is also the editor of the newspaper. A allows the publication of a defamatory article about a prominent person P, without checking its validity. P sues the firm for libel. The firm will be liable for this act of the editor partner as the omission which caused loss of goodwill to P was done in the usual course of business.

 

6. Liability of firm for misapplication by partners: Section 27 provides that the firm is liable to the third parties where (i) a partner, acting within his apparent authority, receives money or property from a third person and misapplies it, or (ii) the firm in the course of its business receives money or property from a third party and the money is misapplied by any of its partners while it is in the custody of the firm. For example, X, Y and Z are partners in a business. K, a debtor of the firm repays his debts of Rs. 10,000 to X who does not inform Y and Z about the repayment and misuses the money. K would be discharged of the debts on account of payment made to X.


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