Implied Authority in Partnerships: Rights, Restrictions, and Liabilities Explained

Introduction:

A partner is an agent of the firm for the purpose of the business and operations of a firm. The actions of a partner bind the firm that are typically necessary to carry on the usual business of the firm. Every partner of a firm has an implied authority to act as an agent of the firm and bind the firm through actions that are typically necessary to carry on the usual business of the firm. And if a partner performs any act that is usually necessary to carry business of the firm, the firm is legally bound by such an act.

A partner’s implied authority does not extend to certain actions unless there is a trade custom or specific authorization by the other partners. These restricted actions include:

·        Opening a bank account in the partner’s personal name instead of the firm’s name,

·        Compromising or relinquishing any claim or part of a claim that belongs to the firm,

·        Referring a business-related dispute to arbitration,

·        Withdrawing a lawsuit or proceeding filed on behalf of the firm,

·        Admitting liability in a legal proceeding against the firm,

·        Acquiring immovable property (like land or building) on behalf of the firm.

·        Selling or transferring immovable property owned by the firm,

·        Entering a partnership with another party on behalf of the firm, and

·        Borrowing on behalf of the firm for the partner’s personal use.

All the above specified actions of partners require the explicit consent of all partners. The intention behind these limitations is to protect the firm’s interest over individual partners’ unilateral interests. Such implied authority of a partner can be restricted or extended through a contract among the partners; for example, partners of a firm may allow a specific partner to do acts that are normally beyond the scope of implied authority or limit the ability of a partner to act in a way that would ordinarily be within their implied authority. And any act done by a partner that falls within their implied authority will bind the firm.

But there are exceptions to the firm’s liability in certain cases. For instance, if the person dealing with the partner is aware of a restriction placed on the partner’s authority and still chooses to deal with the partner on an issue beyond the implied authority granted to them, the firm will not be liable. Similarly, if the person dealing with the partner does not know or believe that the individual is a partner in the firm, the firm’s liability does not arise.

Example:

1.   Restriction of Authority: If the partners of a firm agree that Partner A cannot enter into contracts worth more than 1 lakh rupees, but Partner A enters into a contract for 2 lakh rupees with a supplier, the firm is still bound by the contract entered into by Partner A unless the supplier was aware of this restriction.

2.  Third Party Knowledge: If the supplier knows that Partner A’s authority is restricted, the firm will not be bound by the contract entered into By Partner A

Partner’s Authority in Emergencies:

In situations where immediate action is necessary to prevent loss to the firm, partners have the authority to take necessary actions, even if such actions are restricted by the firm. A partner is allowed to take all reasonable steps that a person of ordinary prudence would take to protect their own interests in similar circumstances. These actions taken by the partner in emergencies are binding on the firm, ensuring that the firm is protected from potential harm.

Acts that Bind the Firm:

For any act or instrument executed by a partner to legally bind the firm:

• It must be done in the name of the firm, or

• It must be executed in a manner that clearly shows the intention to bind the firm.

Liability of Firm for Acts of Partners:

• If, in the ordinary course of business of the firm, a partner commits a wrongful act or omission, and if it causes loss or injury to any third party or incurs any penalty, the firm is liable to the same extent as the partner.

  
  

• If a partner, acting in the ordinary course of business, receives money or property from a third party and misuses it, or if the firm, in the course of its business, receives money or property from a third party and the money or property is misapplied by any of the partners while in the firm's custody, the firm is liable for such losses to third parties.

Conclusion:

In a partnership, each partner acts as an agent of the firm and has implied authority to perform actions that are necessary for the usual course of business. However, there are specific actions that require the explicit consent of all partners to protect the firm’s interests. Implied authority can be extended or restricted by mutual agreement between partners, ensuring flexibility while safeguarding against unauthorised decisions.

The firm is bound by acts of partners made within their implied authority, but exceptions exist. If a third party dealing with a partner knows of a restriction on the partner’s authority or does not recognize the individual as a partner, the firm may not be liable.

Additionally, in emergencies, partners have the right to take prudent actions to prevent harm to the firm, even if such actions are beyond their usual authority. Overall, understanding the concept of implied authority and its boundaries is crucial for maintaining trust, efficiency, and accountability in a partnership.