This article is written by Philip Ashok Alex, a student from National Law University, Delhi. In this article, the author discusses the extension and restriction of a partner’s implied authority.
Table of Contents
Introduction
Partnership is defined under S.4 of the Indian Partnership Act. It implies that business of the firm is to be carried on by all or any of them acting for all. A partner’s authority maybe express or implied. It is either given by words, spoken or written or is implied in cases where there is no express agreement. In that particular case, the law itself grants certain powers and does not allow the partners to carry out certain other functions. “Implied” denotes authority vested on the partner based on what is apparent from the position that he holds in the firm in relation to the business carried on by the firm.
In the general perception of law, each partner is considered to be an agent of the partnership and is expressed to be the praepositus negotiis societatis, who can bind all the other partners to his actions which are well within the scope and object of the partnership. Every partner is supposed to be an agent of the partnership, and his rights, powers, duties and obligations are all covered in a same manner as per the rules governing the agent. They hence hold a dual role – of that of a partner and that of an agent.
The Principle of Implied Authority in the Indian Partnership Act
Determination of Partnership
In the case of K.D. Kamath v C.I.T, the Supreme Court (see here) laid down 2 essential elements required to constitute a partnership:
(a) there must be an agreement to share the profits and the losses and
(b) the business was to be carried on by all partners or any one of them acting in the interests of all. This is an essential element in determining mutual agency which is said to be one of the most important tests in determining partnership in addition to that of sharing of profits and losses. The principle of agency is not coupled with the right to reasonable remuneration for the work done since it is done on behalf of the firm.
The prudent partner’s not having knowledge or disapproval of the same does not absolve them of their personal liability or from holding the firm liable. However, the firm will not be bound if the acts done by the partner under his implied authority was “outside the usual course of business of the firm”, even if it were to be a prudent decision ratified by all the partners of the firm. In short, the partner has the authority to do the usual but does not have it extended enough to do the unusual. And for the determination as to what is usual and what is unusual, the question is answered by the nature or kind of businesses carried on by the firm.
A Partner’s Implied Authority
Section 19 of the Indian Partnership Act (see here) defines ‘implied authority’ as the authority of a partner to bind the firm to his actions. While the first part of S.19 uses an affirmative rule in determining the implied authority of a partner, the latter provides a negative rule listing out all the functions that a partner is not permitted to do, and thereby draws a demarcation as to where the implied authority is extended and restricted. In order to determine implied authority, the act ought to be done in such a manner so as to imply an intention to bind the firm. The confirmation of whether it is an act in the usual course of business, the nature of the business and the practice of the persons engaged in it ought to be checked and analysed. Moreover, what constitutes the definition of “usual course of business” shall vary from time to time and hence to affix a straight-jacket definition to the same is not always viable for the purposes of this section.
For the purposes of implied authority and with an impending need to contain such authority, the courts have made a distinction between trading and non-trading partnerships. It was determined over a series of judgments that a business which involves the buying and selling of goods is a trading concern as it is absolutely necessary for the traders to borrow money and issue negotiable instruments, but not in the case of professionals, for instance, solicitors. In the case of non-trading businesses, there can be no implied authority to borrow money for the business. For instance, in cases where the money borrowed by a partner without the authority of the firm was used for the purposes of the firm, the firm becomes liable.
Extension Available and the Restriction Imposed on a Partner’s Implied Authority
What authority can be extended and what cannot be?
Section 18 of the Indian Partnership Act prescribes that “a partner is the agent of the firm for the purposes of the business of the firm”. There is an implied authority that has been vested on the partner to bind the firm until and unless there is a clause or a statement that proves otherwise. S.19(1) of the Partnership Act states that only the acts conducted by the partner in the usual course of business of the firm, binds the firm to the actions of the partner. Furthermore, S.20 suggests that the implied authority granted to the partners can be either be restricted or extended by virtue of a contract between the partners themselves. However, even with such a restriction in place, an act done by the partner on behalf of the firm binds the firm unless the person with whom the partner was dealing with is aware of the restriction of implied authority granted to the partner.
S.19(2) of the Partnership Act enumerates various matters such as submitting a dispute to arbitration, opening a bank account on behalf of the firm, transferring or acquiring immovable property on behalf of the firm, which a partner cannot do under the liberty of implied authority and this is in absence of any usage or custom to the contrary. Even though the list provided in S.19(2) is not exhaustive, it proves to be the only yardstick to measure and contain the implied authority of partners in the absence of any other statutory precedents. Though there are such restrictions that are prescribed by the legislation, any act done by the partner on behalf of the firm binds the firm, until and unless the third party is aware of the restrictions that have been imposed and does not know or believe that the person is not a partner.
What can the partner do and not do?
S.20 of the Partnership Act provides that “the partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner”. S.11 also recognises that the partners ought to be allowed as much freedom in regulating their relations in the firm inter se. The restriction and the extension of the implied authority of partners can be done with the consent of all the partners and should not be a decision made by one person or the majority, in isolation. With regards to any such limitations that are brought out by contracts regulating the authority amongst them, the third parties need not be affected by these until and unless (i) such a restriction was known to them or (ii) they neither believed nor knew that the person was a partner.
The implied authority and its extension ought to be seen in light of the intention of the doer to bind the firm to his/her actions. This intention however, has to be inferred from the facts and circumstances of the case. The intention of the partner at the time of his actions are to be checked and not the intention in any subsequent time. For instance, if a partner of the firm borrows money under his own name with a clear intention to utilise it for the business of the firm, this action does not fall within the ambit of “implied authority” even if it was ultimately used for the purposes of the firm.
S.22 prescribes the manner in which a partner of a firm is to act within the scope of their implied authority so as to bind the firm to their actions. Any act which is done on the behalf of the firm and executed in the firm name and with an express or implied intention to bind the firm, attracts the provisions of S.19. If it is done in the name of the firm, there is no difficulty in tracing the actions of the partner back to the frim. But in a case where the act was done with an implied intention to bind the firm, such intention as referred to, should be inferred from the facts and circumstances of the case.
Case Laws Defining the Scope of a Partner’s Implied Authority
In the case of Premabhai Hemabhai v T.H. Brown, (see here) it was ruled that the partner could bind the firm within the limits of the firm’s implied authority that has been extended. Similarly, in the case of Motilal Manucha v Unnao Commercial Bank Ltd., (see here) it was opined that even upon cancellation of the implied authority by the partner, the liability of the firm could still be determined as far as it was unknown to the notice of the third party who acted under the impression of the extended implied authority.
In the case of Mathura Nath v Bageshwari Rani, the firm dealt with the business of catching white elephants and also was involved in hiring elephants for similar purposes. When a partner of the firm entered into an agreement of a similar nature so as to hire elephants, it was ruled that the act done by the partner was of the kind of business as done by the firm. A partner has the implied authority vested on him to receive payment on behalf of the firm and give a valid discharge by issuing a receipt for the same.
However, in Dali Chand v Mathura Das (see here), it was ruled that the partner lacked the implied authority to get the credit of the firm to set off against his personal debts and give a discharge on behalf of the firm. In the 2005 case of SBI v Simko Engineering Works, it was ruled that unless contrary intention was proved, the implied authority of every partner is traced to be inherent. A partner who contests otherwise also has to prove that there is no inherent power of implied authority as per the contract or the partnership deed.
Within the Sphere of a Partner’s Implied Authority
When a contract is entered into by one of the firm’s partners, it is usually binding on the firm and the other partners when it is subsequently rectified by them or when the validity of such a contract is not denied by either of the partners. The acts done by a partner in excess to the implied authority granted to them can be ratified by the other partners, provided that the acts so done are legal.
Joint Venture
It has been generally accepted that the partner’s implied authority is not extended thus far so as to allow him to enter into a partnership with other persons in another business. There was a clear distinction drawn between engaging in a partnership and getting involved in a single transaction. The arrangement of mere buying and selling on behalf of the firm is thus allowed although entering into a separate partnership for another business does not fall within the sphere of this authority.
Legal Proceedings
It is within the sphere of the implied authority of a partner to defend an action that has been brought against the firm. He is also empowered to assign a lawyer for the same. There can be situations where there is a clause in a deed of partnership that specifies the extent to which the partner is allowed to act on behalf of the firm and also enumerates the actions for which the consent of the other partners is required so as to bind the firm.
Admission of Liability to Tax
In the case of Darpan Cinema v State of Gujarat, (see here) where the firm was facing the threat of having its cinema licence cancelled, an admission made by one of the partners of the liability of the firm to pay an amount due under the entertainment tax was held to be binding on the firm.
Partner Acting in Self-interest
The act done by a partner within the scope of his implied authority does not bind the firm if it has been done by him, for his own purposes and not for the firm, to the knowledge of the third party. Therefore, when a partner uses the funds of the firm to clear his personal debts and makes a payment in that regard, the firm is not bound and can recover back the money.
Negotiable Instruments
In this case, one member of the firm of bankers, ordinarily, draws, accepts or indorses a bill of exchange on behalf of the firm, and in requiring each member of the firm to sign that would not be viable practically. However, the drawing and acceptance of bills is not in the usual course of business of a solicitor and hence, the firm should be bound in no way whatsoever.
Conclusion
The underlying idea, from the above analysis of a partner’s implied authority within the scope of the Indian Partnership Act, is that there is no set of rules laid down for the determination of the same. Even though S.19 of the Act broadly defines “implied authority” and lays down restrictions on a partner’s implied authority, it is not exhaustive. However, with the help of various judgments and precedents, numerous parameters have been laid down so as to determine the implied authority of a partner. One such determinant is that the actions of the partner are to be done in the usual course of business of the firm. Therefore, we can conclude that the determination of a partner’s implied authority differs in various contexts and is contingent on multiple factors.
References
Statutes
- Indian Partnership Act, 1932
Case Laws
- Rajnikant H. Golwala v Natraj Theatre AIR 2000 Guj 80
- K.D. Kamath v C.I.T (1971) 2 SCC 873
- State Bank of India v SIMCO Engg. Works II (2005) BC 199 (P & H)
- Kadiyala Seshagiri Rao v Kanneganti Dasaiah AIR 2000 AP 263
- Janki Nath v Dholkar Mal (’35) A.P. 376, 156
- Premabhai Hemabhai v T.H. Brown (1873) 10 Bom HCR 319
- Motilal Manucha v Unnao Commercial Bank Ltd. AIR 1930 PC 338
- Mathura Nath v Bageshwari Rani AIR 1928 Cal 57
- Dali Chand v Mathura Das AIR 1968 Bom 428
- Darpan Cinema v State of Gujarat (1994) 1 Guj LH 459
- S.N. Soni v Taufiq Farooki AIR 1976 Dec 63
- Sanganer Dal and Flour Mills v FCI AIR 1992 SC 481
- M/s National Small Industries Corp. Ltd. v Punjab Printing and Metal Industries AIR 1979 Del 58
- SBI v Simko Engineering Works (2005)
Foreign Case Laws
- Cox v Hickman (1860) 28 HLC 68
- Higgins v Beauchamp, (1914) 3 KB 1192
- Bank of Australia v Berillat, (1847) 6 Moc PC 152 at Page 193
- Wheatly v Smithers (1970) 2 KB 684
- Hawksley v Outram (1892) 3 Ch 359 (CA)
- Lindern Trawler Managers v W.H.J. Trawlers (A Firm) (1949) 83 LI L Rep 131
- Tomlinson v Broadsmith (1896) 1 QB 386 (CA)
- Kendal v Wood (1871) LR 6 Exch 243
Books:
- Lindley on Partnership, 14th edition
- Pollock, The Law of Partnership (15th edn., 1952) 31; Forster v Mackreth, (1867) 2 Ex 163.
- L.C.B. Gower (Ed.), The Law of Partnership (15th edn., 1952) 31
- Scamell (Ed.), Lindley on Partnership (12th edn., 1962) 168
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
