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This article is written by Prachi Kashinath Gharat who is pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from Lawsikho.

Table of Contents

Introduction

Partners collectively are known as firms. All partners in a firm are principals on his behalf and agents on behalf of other partners. In the case of a firm, every partner is jointly accountable for the acts of the firm and conversely, every firm is accountable for the wrongful acts done by partners on behalf of other partners.

Section 25 of the Indian Partnership Acts deals with the liability of a partner for the wrongful act of the firm and Section 26 and 27 of the Indian Partnership Act deals with Liability of the firm for wrongful acts of a partner, liability of firm for misapplication by partners respectively. 

There is a vicarious liability of the firm. Vicarious liability means the liability of a person for the wrong act done by another vicarious liability is based on two maxims which are ‘Quit facit per alium facit per see which means ‘He who acts through another does the act himself’ and ‘Respondeat Superior’ which means ‘Let the Superior be Liable’. 

In the case of Smt. Vunna Visali v. State of Andra Pradesh it was held by the court that every partner is liable for an ‘act of the firm’. ‘Act of a firm’ has been outlined to mean ‘any act or omission by all the partners or by any partner or agent of the firm which results in a right enforceable by or against the firm’. This is often the civil liability of the firm and its partners.

The firm is made liable in case of two situations:

  1. Liability of the Firm for Wrongful acts of a Partner
  2. Liability of Firm for Misapplication by Partners

Section 26: Liability of the firm for wrongful acts of a partner

Whereby the wrongful act or omission of a partner acting in the ordinary course of the business of a firm or with the authority of his partners, loss or injury is caused the firm is liable therefore to the same extent as any other partner. The principle of this section is a branch of the universal rule that everyone must answer for the acts and default of his servants or agents in the course of their employment. 

All the members of a firm will be liable for the negligent advice given by one of them to the client of the firm or for the negligent conduct of their client’s claim. The firm being a legalised entity, it is operated by its partners. 

The firm itself cannot transact its business. Contravention of any law by any one of the partners of the firm would be a contravention by the firm itself. If one partner in the ordinary course of business of the firm commits a breach of revenue laws, all the partners will become liable for the consequent penalties. 

A firm may also be accountable for money which has come into its funds by the irregular or deceitful act of either a partner or an agent who is not a partner and this whether the act was in the ordinary course of business, at all events if the partners knew or might have known of the payment and its source

The expression injury in section 26 indicates a tort. The liability of a firm for the torts of a partner rests on precisely the same principles as the liability of a master for the torts of his servant, in as much as both are merely branches of the law of principal and agent. Basically there is vicarious liability between the firm and the partners. 

Case laws Section 26

Venkat v. Natesa, (1939) I MLJ 905:

In this matter, N and K entered into a partnership to supply goods to jails wherein K provided capital for the partnership business and N did the work. K bribed officials to make entries in the account books as items of expenses. N also paid out firm funds in bribes. 

In a suit filed by N against K for the dissolution of partnership and taking of accounts, K objected to the amount spent in bribery by N being taken in account. N objected to the amounts spent in bribery by K. The Court held that neither N nor K was authorised to debit the partnership with money spent for an illegitimate purpose.

Hamlyn v. John Houston & Co 

In this case, X and Y were partners in a firm and X was a working partner out of the two. Hamlyn was a person who was operating a similar business to that of X and Y. Hamlyn clerk was bribed by X for getting some important information which was the confidential entries with the details of the third parties. 

This information was used by X for making his business successful. As soon as Hamlyn realised the fraud played on him by X and his clerk he sues X’s firm for damages. Damages were awarded by the court but an important question arose before the court of whether the Y is liable for the wrongful act done without his consent and knowledge. It was held by the Court that all the partners of the firm are responsible for the wrongful act committed by the partners of the firm.

Section 27: Liability of firm for  misapplication by partners

As per Section 27 of the Indian Partnership Act 

  1. Any money or property received by a partner from a third party in the exercise of his authority is misapplied by the partner or,
  2. Any money or property is received by the firm in the course of business, is misapplied by the partner.
    Then the firm shall be liable for the same.

Clause (a) of Section 27 varies from clause (b), under clause (a) to hold the firm liable it is necessary to prove that a partner while acting in an apparent authority has received money or property from the third party. 

The property so received shall be deemed as the property received by the firm. It is irrelevant whether the co-partners have any awareness of the delivery of that property. Because a partner receives that money or property as an agent of the firm.

However, the firm will not be liable for the property misapplied by a partner when

  1. The partner or agent has got that property, not in the course of business,
  2. Such property was received by him not under the authority of an agent but for his personal use. 

Clause (b) of Section 27 lays down that where a firm obtains money or property from the third party in the course of business, and any partner of that firm misapplied that property while the property is in the custody of the firm, the firm is liable to make the good the loss. 

Under this section to hold the firm liable, the following conditions must be satisfied 

(a) The firm has obtained that property in the course of business, and

(b) At the time of misappropriation, such property must be in the custody of the firm.

To make the firm liable under this section the following requirement must be fulfilled

(a) that the partner has acted in his apparent authority, 

(b) that the partner obtained money or property from a third party;

 (c) that the partner has misapplied such property; 

The firm will be liable when 

(a) it obtains money or property in the course of business; and

(b) such property was applied by its partners while in its custody. 

Case laws for Section 27

Rhodes v. Moules, (1895) 1 Ch 236

In this case, one of the partners of a firm of a solicitor was requested by a client to obtain a loan for the client on the mortgage of some property. The said partner told the client that the mortgagees wanted some additional security and thus obtained from the client some share warrants payable to the bearer. 

He subsequently misappropriated the share warrants and absconded. The other partners had no awareness of the deposits of the warranties and consequent appropriation thereof. It was found that on some earlier occasions such share warrants had been received through the same partner from the same client by this firm. 

It was, therefore, held that it was within the apparent authority of the partners to receive the share warrants, the partners were liable for the misappropriation of the warrants made in the case. 

To make the firm liable for the acts of a partner, it is necessary that such a partner while receiving money or property from a third party acted within his apparent authority. If the act done is not permitted under such authority, the firm cannot be made liable for the same.

Cleather v. Twisden, 28 Ch D 340

One of the partners of a firm of solicitors received some bonds payable to the bearer and misappropriated the same. It was found that the reception of such securities for safe custody was not a part of the business and consequently it was held that the other partners could not be held liable for the same. 

The position would have been different if receipts of such bonds had been within the implied authority of the partner concerned. Wherever a party has faith or deals with a partner and not within the firm, the firm may not be accountable. 

A customer of a banking firm deposited with the firm a box containing securities. Afterwards, he authorised one of the partners only to take out some of the securities and to replace them with some others. The firm was held not liable when that partner misappropriated some of the securities.

Conclusion

In the case of business, a firm and the partners to the firm are vicariously liable for the acts done. Statuary liabilities have been imposed as a firm and the partners may get involved with third parties in course of business. 

The circumstances and evidence determine who will bear the liability. A partner who ceases to be the partner to the firm would not be responsible for the acts however he will be responsible till the time he is a partner to the firm. 

The dissolution of the firm also does not make the partner free from his liabilities. But in case of public notice has been issued by the partner he will not be made liable. 

References


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