In this blogpost, Sudhi Ranjan Bagri, Student, National Law Institute University, Bhopal, writes about Section 28 of the Indian Partnership Act; whether a person can be held liable as a partner even if he is not a partner.

Introduction

The rule of the agency by estoppel is applicable in law related to partnership too. The concept of ‘holding out’ is in essence application of the principle of estoppel, which in itself is a rule of evidence according to which a person is prevented or ‘estopped’ from contradicting his previous statements made, which was believed to be true. Holding out refers to a course of action or omission which leads others to believe that the person possesses an authority which in fact he doesn’t. In simple terms, if a person represents that he is a partner of a particular firm, and some other person carried on some transaction believing him to be a partner of the firm, then is estopped from denying this representation later on.

This principle has been recognised in Section 28 of Indian Partnership Act, 1932. This section states that a person is held liable as a partner by holding out if such conditions are fulfilled:

1. He represented himself or knowingly allowed himself to be represented as a partner.
2. Such representation may be by spoken or written words, by conduct or by knowingly permitting others to make such representation by words or conduct.
3. The other party on the faith of such representation gave credit to the firm.

For example, X and Y are partners in a firm. Another person Z manages the firm on their behalf and performs various tasks like placing all orders, making payments, etc. If Z places an order on behalf of the company, then the payment has to be made by the partners, as they have implied authorised Z to function as a partner and did not inform the suppliers or the customers that Z was only a manager. However, if a person is aware that Z is merely a manager and not a partner, then he cannot sue the company to make good the losses incurred by dealing with Z as a partner.

A partner by holding out is liable to the person giving credit, to make good the loss which any third party may suffer. However, he does not acquire any claim over the firm, and doesn’t become a ‘real’ partner, but he does become liable for compensation to the third party whom he induced as a partner by holding out and caused him suffer loss or injury due to such representation.

Ingredients of Partnership by Holding Out

1. There must be representation

The voluntary representation by the person who is depicting himself as a partner of the firm should have been made, though it is not necessary that the representation must be express, it can be implied too.

In case of Bevan v. National Bank Ltd.,[1] where Mr. MW was the manager of one Mr. B’s business. The business was carried on in the name and style of MW and Co. The Plaintiff who had supplied the goods sued MW to recover his money as one of the partners of the firm, but B contended that he should not be held liable because the style of the firm carried the name only of MW. Court held that he was liable and laid down that where a person carries a business in the name of an individual with the addition of the words “and Co.” and employ that individual as manager of the business to whom the entire management of the business is left, that doesn’t amount to holding out that person as sole owner of the business, it may amount to holding out that he is partner in the business. MW was also liable because by permitting his name to be used in the title of the firm he made a representation that he was a partner and responsible to those who had given credit to the firm on the faith of that representation.

2. Knowledge of representation and acting on it in good faith

The second requirement of liability for holding out is that a person seeking to charge another with liability has to show that he had knowledge of the representation and did act under the belief that the facts represented were true. Where there is no representation to the plaintiff or, at any rate, there is no representation to his knowledge, his right to sue the person making such representation does not arise.

To charge the defendant with liability as a partner on the ground of representation of himself as a partner, it must be proved either that he has represented himself as a partner to the plaintiff or has made such a public representation of himself in a character as to lead the court to conclude that the plaintiff knowing of the representation and believing that the defendant to be a partner gave him credit under that belief.

If the plaintiff has acted on the faith of representation, liability is incurred by him, and it is immaterial that the defendant didn’t know that this representation had reached to the plaintiff.  But if the plaintiff has not heard of the representation or having heard didn’t believe it or knew the real truth, then in such cases no liability by holding out arises because he has not been twisted by the representation.

The person representing himself to be a partner is liable as a partner to anyone who has on the faith of any such representation gave credit to the firm.

Scarf vs. Jardine[2] is an important case for the principle of holding out wherein the importance of notice of retirement was highlighted. The court, in this case, stated that the retiring partner must give notice of his retirement from a firm in the same manner as a notice of appointment is given, so that the people can know about his status with regard to the company. Or else, he might be treated as a partner by holding out no matter how long back he retired from the firm without notice.

The court further stated that such notice can be given either by the retiring partner or the existing partners of the company. Unless such notice of retirement is given, the liability of a retired partner to old creditors or customers subsists, and the firm would also be liable for the acts of the retired partner.

There are exceptions to the rule established in the Scarf v. Jardine[3] case as given below:

1. The death of a partner constitutes sufficient notice by itself.
2. Insolvency of a partner is also sufficient notice and attracts Section 42 of the Indian Partnership Act.
3. If one has been a dormant or sleeping from beginning to end, notice can be dispensed with as neither the customers nor the clients know of his participation in the firm.

In English law, Partnership by holding out is referred to as apparent partnership instead, and the legal provisions in both countries are very similar.

In Smith vs. Bailey[4], it was decided that the liability on the principle of Estoppel extends only on account of credit given to the firm and not to torts or civil wrongs committed on behalf of the firm.

Conclusion

Partnership by holding out means when a person represents himself to be a partner of a firm and a third party believes in such representation, the person afterwards cannot deny his liability towards the third party.

Similarly, if a person is representing himself to be a partner, and the firm has knowledge about such representation but did not do anything to stop such representation. So, when a third party entered into a transaction with such person then firm would be liable for the act of such person, but the liability would only be limited to such representation and cannot be unlimited.

Moreover, when a person is admitted to a partnership by way of holding out, he cannot claim any rights in the property of the firm and his rights will be limited to such representation only. Furthermore, if a third party knew about the reality behind the representation even though he entered into transaction with such person then firm would not be liable for the transaction.

[1] Bevan v. National Bank Ltd., (1906) 23 T.L.R. 65.

[2]Scarf vs. Jardine, 1882 7 APP CAS 345.

[3] Id.

[4] Smith vs. Bailey, 2 QB 432.