This article is written by Samiksha Madan, a law student at Symbiosis Law School, Hyderabad. This article examines the concept of estoppel and substantiates the various provisions relating to the liability of a partner by estoppel.

This article has been published by Sneha Mahawar.

Introduction 

According to Sir Edward Coke, estoppel is, “where a man’s own act or acceptance stoppeth or closeth up his mouth to allege or plead the truth.” The case of Pickard v. Sears (1837) established the principle of estoppel, which is based on the values of good conscience and equity. Moreover, it seeks to prevent fraud and uphold justice by encouraging honesty and good faith. This case determined that when an individual has, by words, or his conduct, wilfully caused another to believe the existence of certain facts, and induced him to act accordingly on that belief so as to alter his own previous position, then such a person would be restricted from giving a different state of things as opposed to those existing. A partner by estoppel is a partner who has misrepresented himself as being a partner of a firm in an express or implied form and is subsequently barred from stating otherwise later. Therefore, the rationale behind holding a partner by estoppel liable for any acts done by a third person based on the representations made by the former at one point in time is to estop or preclude him from contradicting his previous position which was believed to be true. 

This article primarily attempts to explain who a partner by estoppel is and what are the various provisions and liabilities which the law provides to regulate the same.

What is estoppel 

Estoppel is a rule that prevents an individual from asserting a claim, a right, or a fact that is contradictory to the stance previously adopted by that individual, either expressly or impliedly, particularly when a representation has been relied on and subsequently acted upon by others. This legal principle can be found in many common law systems (for example, the USA, the UK, Canada, and so on), but the forms of the doctrine governing it vary from country to country. The rule of estoppel can be found to be essential to a substantial portion of Indian provisions. The good old Doctrine of Promissory Estoppel forms a vital part of the Indian Contracts Act, 1872, which prevents the promisor from contradicting their promise, provided the promisee must have relied on such a promise and suffered a loss as a result of its non-performance. 

Illustration – A, the promisor promised delivery of 5kg of rice on 26th November to B, the promisee in consideration for a sum of Rs. 500. B, relying on such a promise paid half of the amount in advance. However, A, on the date of delivery, defaulted without a reasonable explanation. Therefore, in this instance, since B has suffered an economic loss as a result of the promise that was made, the requirements of a Promissory Estoppel shall be said to have been met.

In addition, Section 115 of the Indian Evidence Act, 1872, incorporates the meaning of estoppel stating, “When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.” The aforementioned provision extends to explaining what exactly an estoppel would entail by substantiating an illustration that states, ‘A’ intentionally and falsely leads ‘B’ to believe that certain land belongs to A, and thereby induces B to buy and pay for it. The land afterwards becomes the property of A, and A seeks to set aside the sale on the ground that, at the time of the sale, he had no title. He must not be allowed to prove his want of a title.

Who is a partner by estoppel 

There are various types of partners in a partnership firm, ranging from active or secret partners to nominal or minor partners. When talking about a nominal partner, it is important to note that they can also be referred to as ostensible or quasi-partners. A key characteristic of this type of partner is that he does not invest money or contribute capital, participate in business or management decisions, or share in the company’s profits or losses. He merely lends the company his goodwill, which includes his name and reputation. An individual would have either represented himself (partner by estoppel) or knowingly permitted another person (partner by holding out) to represent him as a partner. By doing this, he makes himself responsible to everyone for the firm’s debts. 

When a person, through his actions or behaviour, leaves an impression on third parties that he/she is a partner to a firm such that the latter relying upon the same does an act, then he/she would be regarded as a ‘partner by estoppel’. This basically means that even though the individual concerned is not a partner, he or she has represented themselves as one, and as a result, is now a partner by estoppel.

Tabular representation of the difference between a partner by estoppel and a partner by holding out

Partner by estoppelPartner by holding out
A  partner by estoppel is when an individual represents himself as a partner, either by words written or spoken or by conduct. He is said to be liable to all those who, relying on such a representation, advance money to the firm. A partner by holding out is when an individual is represented and declared as a partner, and the same remains undeniable by such an individual even after being made aware of the same. He is said to be liable to third parties who lent money to the firm on credit, relying on such representations and declarations.
Example: For instance, Raghu, a rich man, tells Ganesh that he is a partner of a firm named Elite Enterprises, though, in reality, he is not. Ganesh, relying on such a statement made by Raghu, sells goods worth Rs. 50,000/- to the named firm. Here, if the firm is unable to pay the said amount, Ganesh can recover it from Raghu, as he is a partner by estoppel.Example: For instance, Hari tells Ganesh, in the presence of Raghu, that Raghu is a partner in the firm of Elite Enterprises. Raghu does not deny the declaration, and an impression is made. Ganesh, relying on such statements, grants a loan to the tune of Rs. 50,000/- to the firm. Here, if the firm fails to repay the loan to Ganesh, Raghu could be held liable to pay Rs. 50,000/- to Ganesh. Therefore, Raghu is a partner by holding out.

Provisions for partnership by estoppel under the Indian Partnership Act, 1932 

The concept of ‘holding out’ is nothing but an application of the principle of estoppel, which in simple terms is a ‘rule of evidence’ wherein an individual is abstained or estopped from denying a statement made by him or the existence of such facts as may make another believe the same. An important case in this regard is Mollwo, March & Co. v. Court of Wards (1872), wherein it was emphasised that the “doctrine of holding out” is an application of ‘estoppel’. In this case, Lord Esher MR explained that “If a man holds himself out to be a partner and makes a man act upon that supposition, he cannot afterwards say that he is not a partner.” 

Prior to the Partnership Act of 1932, the Indian Contract Act of 1872 contained the law governing partnerships in Chapter XI (Sections 239–266). Section 28 of the Indian Partnership Act of 1932 and Section 29 of the Limited Liability Partnership Act of 2008 both mention the concept of holding out. By holding out, a person is said to be liable as a partner if the prerequisites as per the sections are met.

The following essential ingredients can be ascertained by going through a brief reading of Section 28 of the Indian Partnership Act, 1932, and Section 29 of the Limited Liability Partnership Act, 2008. 

Representation 

The principle of estoppel or holding out would be applicable in situations where an individual has voluntarily represented himself to be a partner of a firm or where an individual has not repudiated being a partner at the relevant time. It is not necessary that the representation be in express form. An implied representation would also be considered valid and, therefore, cannot be denied.

Illustration

(i) Mr. R loaned money to G for establishing a dairy farm. He started taking a keen interest in the business and utilised his personal influence in order to acquire a lease on premises and was subsequently present there to receive parties and their demands. Mr. D supplied a certain amount of material to the firm under the impression that Mr. R was a partner. Here, Mr. R would be held liable as a partner by estoppel through conduct. 

(ii) T introduced K to C as his partner at Stark Enterprises, when he, in reality, was not. K did not deny such a representation was made; hence, he would be held liable as a partner for holding out.

Knowledge of representation 

Another essential requirement would be knowledge of the representation made. The person being represented as a partner to a firm must be aware of and have knowledge of any such representations being made. As a result, either the person should have made the false representation themselves or, in the case of a third party, should have been aware of it and not refuted it. Moreover, the plaintiff holding the defendant liable must have knowledge of such representations.

Illustration

(i) Where A represented himself as a part of XYZ firm, he would be held liable as a partner by estoppel if B acted on this belief. 

An act done as a result of the representation made 

Lastly, the plaintiff must have acted on the faith of such representations made in order to hold the defendant liable as a partner. 

Illustration

(i) Where Gautam has represented himself to be a partner of Reul Enterprises, and Joel has given credit to the firm relying on this belief, Gautam would be held accountable if the firm defaults on the payment to be made. Gautam, here, is liable as a partner by estoppel and cannot escape liability or deny such representations made later on.

Liabilities of a partner by estoppel 

A partner by estoppel or holding out would be liable to the third party who gave credit, relying on the representations made. It is the responsibility of such a partner to make good on the losses incurred by the third party. It must, however, be noted that he does not acquire a claim over the company, nor does he become a “real partner,” but rather merely becomes liable for compensating the third party or the losses and injury suffered due to representations made. It must also be noted that the liability of a partner who has died or become insolvent, or dormant (provided the debt was taken by an acting partner after the dissolution of the firm) forms an exception to the doctrine. In countries like America, such liability is governed by the Revised Uniform Partnership Act (RUPA) of 1997, which states that a person who allows another individual or party to solicit business as if they were partners should be considered one by third parties. This is consistent with the feature of partners being held “jointly and severally” liable for acts committed and occurring as part of the business. The types of liabilities can be broadly categorised into three types:

Pro-rata liability 

If there is no pre-existing relationship and all persons represented as partners accept the representation, the liability is shared or pro-rata between the one who portrays themselves as a partner and all others who established and agreed to the representation.

Partnership liability 

When the real partners consented to the representation, the one who claimed to be a partner or agreed to it and the real partner is considered a ‘partnership liability.’

Separate liability  

The liability is separate if there is no prior relationship and merely a few or none of the others are represented as partners, or if none of the stakeholders in an existing partnership agreed to the representation.

Therefore, the party misrepresenting themselves would be held accountable as a general partner if the court finds that there was a representation made, regardless of whether they intended to create a partnership or whether they participated in the actions that resulted in the losses and damages.

Judicial pronouncements on partners by estoppel 

Scarf v. Jardine (1882) 

Scarf retired from a firm where he and Rogers were partners. Scarf was replaced by Beach, however, there was no public announcement of the retirement of Scarf or the recognition of Beach as the new partner. When dues for the goods supplied by one Jardin, an old supplier to the company, were not paid by the company, he sued the company and the earlier partner Scarf as well. 

Judgement: 

The Court, in this case, assessed the facts and reached the conclusion that the notice of retirement of an outgoing partner and the appointment of a new partner must be given, failing which he would be considered a partner by holding out. It was held that since Jardine sued the new firm (Rogers and Beach without Scarf) in the first instance and later on Scarf, he, through an implied agreement, acknowledged the new firm. Lastly, Jardin could no longer sue the older firm for the same cause of action because it violated both natural justice principles and the Partnership Act. The case highlighted certain exceptions to the rule, which include:

  1. The death of a partner would be considered sufficient notice by itself.
  2. The Insolvency of a partner would also constitute sufficient notice by itself and additionally would attract Section 42 of the Indian Partnership Act.
  3. Notice need not be given if one has been dormant since the beginning because neither the clients nor the customers are aware of his involvement or participation in the company.

Porter v. Incell (1905)

A large amount of money was loaned by the defendant to the other defendants for the establishment of a farm. Not only did he demonstrate a keen interest in the company, but he also used his personal connections to lower the interest rate. Furthermore, he was mostly on land, receiving parties and looking closely at the business. The plaintiff supplied building material to the defendants, relying on the impression that the defendant too was a partner, and sued them. 

Judgement: 

The Court held that the defendant, in this case, was a partner by estoppel and could be held liable as, by his conduct, he represented himself to be a partner. 

Bevan v. National Bank Ltd. (1960)

In the present case, one Mr. B carried on a business under the name of MW and Co. The manager of the stated company was Mr. MW. When the plaintiff charged both Mr. MW and Mr. B for the recovery of money for the goods he had supplied, Mr. MW contended that since he was not a partner, he should not be held liable. 

Judgement:

The Court held both defendants liable, stating that since the company has the name of the manager and he plays an active role in the business, his being a partner to the company could be implied, and therefore, in the present case, he shall be held liable for the credit given by the plaintiff under the presumption that Mr. MW is a partner. Here, Mr. MW publicly represented himself (though unintentionally) as a partner. Furthermore, while holding Mr. B liable, the Court determined that carrying on a business under a person’s name with the addition of “and Co.” and employing that person as the company manager to whom the entire management of the company is delegated does not constitute representing that person as the company’s sole owner, but it may constitute representing him as a partner in the company.

Conclusion 

Therefore, in conclusion, a partner by estoppel refers to a person who has falsely represented himself to be a partner of a firm, and the party before whom such a representation is made acts on this faith, believing it to be true. It can be stated that the concept of holding a partner liable either by estoppel or by holding out is an effective provision that aims to protect the interests of third parties who give credit based on false representations made to them. The concept, however, is not restrictive to representations made with a fraudulent intention. 

Frequently Asked Questions (FAQs) 

Is any amount of capital contributed by a partner by estoppel to the firm?

Since a partnership by estoppel is nothing less than a presumption partnership, such a partner does not contribute capital or participate in the business of the firm; his liability, however, is unlimited. 

Would there be any liability arising for the debts of the firm in case of a partnership by estoppel?

A partner by estoppel in general may be either formed as a result of his active participation in the management of the company or as a result of the company being permitted to use his name in the business.  As a result, a partner by estoppel would be held liable for the firm’s debts incurred by using their names.

References 


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