Partnership Act- Rights and Duties of Partner
Introduction
Relationship between rights and duties arises in two aspect. One, rights/liabilities with respect to themselves and Second, with respect to third parties.
In this Article We will discuss relation of partners inter se, rights and duties of partner.
Chapter 3, from section 9 to 17 of the Indian Partnership Act contains provision related to "Relations of partners to one another".
Rights and Duties are divided in two parts. First, their are general rights and duties which cannot be override by partner even with express agreement. Second, partners are given free hand in deciding rights and duties of partner in certain matters, but in case they fail, This act will provide default rules, for example sharing of profit equally in absence of any agreement.
Section 11 - General Principle
This section provides general guideline as to rights and duties. It provides that partner can determine rights and liabilities of them by mutual agreement. This agreement related to rights and duties could be expressed or implied which can be infer from the conduct.
Not only partner can make agreement related to their rights and duties, but they can also vary such contract.
Another provision in this section is contrary to what Section 27 of contract act says. Section 27 of Contract Act provides that contract in restraint of trade is void, but in case of partnership such contract could be valid.
Let's understand this by example.If you make a contract with a lawyer that lawyer should not practice for some consideration, such contract would be void. (Also recall, Article 19 of Constitution guarantee you the fundamental right of professing any trade or business).
But if 2 lawyers formed partnership firm expertise in divorce, and they have agreement between them that partner should not carry any other practice apart from that of firm, then such agreement would be valid.
Rights of the Partner
Below are the rights of partners. But one important thing is these rights are subject to any agreement between the partners.
Take for example, right to take part in conduct of business. A, B and C are partner, and they have agreement that C would not participate in conduct of business, then C will not have this rights
Below are some of the rights which are subject to contract between partners.
Right to take part in the conduct of the business : Every partner would have right to participate in normal conduct of business. But in case there is an agreement that some partners would not be allowed to take part, such right will not be available to that partner
Right to Express Opinion : Now this one is important. (Freedom of expression !) Every partner have right to express his or her opinion. However if there is difference of opinion then such matters would be settle by majority.
But can majority do stupid things ? Lord Eldon said that power of majority should be exercised in good faith and not to do stupid things. (Shouldn't this be applicable to democracies as well ?)
Right to access books : Every partner would have right to access books. It includes account books and other recordings. In Internet world this include right to access mail, software data, accounting software etc. Facebook ?
Right to Share profits : This is obvious right. The whole existence of partnership is to earn more and more and more profits. Typically there is an agreement between the parties like Mr Ramesh will take 40% profit, Mr Suresh will take 30% profit and Mr Ganesh will take remaining.In case their is no agreement between the parties, profits will be shared by them equally.
Right to receive interest on capital and advances : Two scenario.
First, if capital is invested by partners and there is an agreement between them that he will receive interest on that capital, then such interest to be paid only from profits.
Second, if for some reason, say electricity bill one partner pays the bill as advances then he can recover this amount.
Duties of partner
There are two flavors of duties too! One their are duties that are general in nature and cannot be override by any contract between partners. Second are duties which are subject to contract of the partner.
First let's a look at the general duties which are discussed in section 9 and 10
Duty to Carry out the business to the greatest common advantage : It will be duty of partner to carry out the business for benefit of the firm. For example, if partner purchase raw material from relative at high price though such material is available at low price and then share the profit with relative, in such case partner has to surrender the profit he made from such scrupulous deal.
To put it simply, when acting in normal conduct of business he should think about firm's profit, firm's benefit instead of personal benefit. Remember partnership is a relationship of trust and faith!
Duty to just and faithful to each other : Partner should be just and faithful to other partners. (like husband and wife!!)
This becomes important in case when majority decisions are taken, it should be taken in good faith and not for arbitrary purpose.
Duty to render true account : It's corresponding duty with the right of rendering full accounts. Every partner should provide details truthfully.
Duty to render full information of all things affecting the firm: Every partner is liable to provide full information of all things affecting the firm.
If their is allegation of corruption or other charges which affect the firm and which would hamper reputation of firm, true information should be given in such cases.
Duty to indemnify for fraud : You know what is indemnify from contract, and we assume you know. So in case if Partner commits a fraud on third party, and then third party sues the firms and firm pay the compensation, then in such case firm can recover the money from a partner accused.
Now let's have a look at other duties which are subject to contract, meaning if their is contract that Mr Salman is not bound to do some of the duties, then Mr Salman is not liable to perform those.
Duty to be diligent : Partner should not commit willful neglect. Partner should not act stupidly deliberately.For example Mr Ramesh and Mr Suresh are trading in Petroleum oil. Mr Suresh tells Ramesh to sell stock oil as oil prices are going down. Mr Ramesh enjoys vacation with his girlfriend neglecting his duties. In such cases firms may incur losses. Hence partners should act diligently.
Duty to use the firm's property properly : Every partner should use firm's property for firm's business and not for personal or private use.
What exactly is firm's property ?
This is defined in section 14. It includes:
- All the property, stock, rights and interest originally
- All the property, stock, rights and interest bought, brought subsequently during conduct of business
- Anything acquired from money of the firms, provided that it was not acquired for personal use
When partner makes profit in below case
- From any transaction of the firms. (Like taking commission)
- From the use of the property or business connection of the firm (Renting out firm's premises)
- From the use of firm name. (Selling personal product using name of the firm)
- Competing against the firm
Conclusion
To summarize this laundry list of rights and duties, remember these are of two types. One are general in nature and applicable all the time irrespective of what you write in contract. Those rights will be available, duties will be applicable to all the partners.
Then there are some duties which are of not general nature and subject to contract. If contract provides that one of the partner Mr Mally will not take part in conduct of business and will not take loan, then Mr Mally will not have a right to take part in it!!
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