Indian Partnership Act- Relationship of partners to third party (Liability of firm by an act of partner)

In previous post, we have discussed about implied and express authority. Under what circumstances firm will be liable to third parties.

In this part we will discuss specific cases such as tort committed by partner, misuse of money by partner etc. In these cases what will be liability of firm and exceptions if there are any. Also we will cover a section dealing with communication to partner.

Ratification of act

As we have studied in Contract of agency, if agent does some act which is beyond the authority granted to him and principle agrees or don't take an objection to this act, then principle will be completely liable.

Same principle is applied in partnership also. Partner is authorized to some things. If he does something beyond the purview of the authority granted to him, and other partners ratifies such act then firm will be completely liable for such an act

For example, Ramesh and Suresh in Chocolate trading business. If Ramesh borrows money from bank, and Suresh don't raise objection and ratifies the act, then their firm will be liable to pay back money to the bank.

Admission made by partner

In ordinary course of business, if partner admits something, then such admission or representation will be used against the firm. This is provided in Section 23 of the act

For example, Ramesh and Suresh, partner. If  Ramesh acknowledge that they owe money to Dr Vijay Mallya, about 5 Crore Rupees for material supplied by Mr Mallya. In this case debt is admitted by Ramesh and hence his firm will be liable to pay back that money.

The admission and representation constitute an evidence against the firm provided third party wnats to make use of such admission or representation.

Liability for torts and wrongful acts

Section 26 provides that if any partner commits tort or wrongful acts in ordinary course of business due to which loss is caused to third party, then firm will be liable for such act.

In Famous case of Lloyd v Grace, Smith and Co, Principle is vicariously liable for wrong by an agent. Since mutual agency exists between partners, then act of one partner make other partner liable.

For example, their is banking firm which manages client's money. If one of the partner utilizes that money for other purpose or for personal use, then firm will be liable to client. (Paisa de do!)

But, but, but.. Such an act should be in ordinary course of business. Say instead of banking firm, law firm is there, and one partner receives money for investment. What does law firm has to do with deposits of money ? Nothing! Since this act was not in ordinary course of business, partnership firm will not be liable.

Liability for misapplication of money or property by a partner

When one of the partner uses money of client improperly, then partnership firm will be liable. But such money should be received in ordinary course of business and partner should receive money in apparent authority, either express or implied.

Section 27 deals with such scenario. There are two scenario mentioned

First, when the money or property has been received by partner and he misapplied the same without accounting for it the firm. For example, there is investment firms who invest client's money in real estate. But one of the partner accept the money and  utilize this sum for trip to Australia to watch Virat Kohli's batting, in this case firm will be liable.

Second, When the money or property has been received by the firm from the third party and the same is misapplied by any of the partner, in this case too firm has to make good the loss. Of course.

  

Provision related to Communication

Section 24 deals with provision with respect to communication. If notice is given to any of the active partner, it will be deemed to be notice to firm.

However there is one exception. If one of the partner is committing a fraud and notice related to it is given to same partner, how will other partner come to know ? Of course they wont. Hence communication made to partner who is fraud will not be deemed to notice to firm.

Conclusion

 We have discussed some of the specific scenarios in which partnership firm become liable to act of individual partner.