Relationship of Partners to Outsiders
Common Law Position
An outsider has two possible grounds to recover from the partnership – where the partner has actual authority or apparent authority. Actual authority: the authority of a partner to do acts clearly stated and agreed to by the other partners (whether written or oral). Apparent authority: the authority that the partner appears to have to third parties (e.g. buying and selling goods, receiving payments, issuing cheques and taking out insurance policies).
The basis of fiduciary relationships between partners was explained by James LJ in Re Agriculturist Insurance Co (Baird’s case) (1870).
“As between the partners and the outside world, (whatever may be their private arrangements between themselves), each partner is the unlimited agent of every other in every matter connected with the partnership business, and not being in its nature beyond the scope of the partnership.” Ref:http://www.studentatlaw.com/articles/157/4/Partnership/Page4.html
Therefore, the general rule is:-
If an action is within the partner’s actual or apparent authority, the firm is liable for the partner’s actions. If an action falls outside the partner’s actual or apparent authority, the partner is personally liable and the firm is not bound by the partner’s actions.
Section 26 recognises that each partner is an agent of the firm and therefore bound to a partner’s actions within their actual authority. Further, there are four requirements to establish apparent authority:-
1. The transaction involved must be within the scope of the partnership business (“business of the kind”); (Polkinhhorne V Holland 1934) 2. The transaction must be effected in the usual way/ when the partner actions are carried out in the usual way. (Goldberg V Jenkins 1889) 3. The outsider must have known, or at least must have believed, that the person with whom he or she was dealing was a partner and must be unaware of any lack of authority of a partner to act. 4. If the Partner does not have any authority & the 3rd party knows this, the Sec 26 will not bind the partnership.
Section 26, element 1:When the partner’s act are within the type of business carried on by the firm.
Polkinghorne v Holland (1934)
Father, son and Whitington were partners in a law firm. The son advised the plaintiff to sell stock and invest proceeds in two companies formed by the son which were mere shells – they did not conduct any business. The investments failed, the son disappeared and the Plaintiff sued the remaining partners (i.e. the father and Whitington).
The remaining partners were liable for the investments made in the two companies. Although law firms do not commonly provide investment advice, it was within the usual course of business carried on by the firm. The Court looked at the firm’s actual activities and found that investment advice was part of them.
Mercantile Credit Co Ltd v Garrod 1962
G and P operated a garage in partnership. P ran the business and G was a sleeping partner. The partnership agreement specified that buying and selling motor vehicles was not to be part of the firm’s activities. In breach of the express prohibition and without actual authority from G, P fraudulently sold a motor vehicle to MC.
Held: Even though what P had done was without G’s actual authority, it was an act falling within the scope of the firm’s business. P therefore had the necessary authority and G was liable under the rules of ostensible authority.
PARTNERSHIP ACT 1895 - SECT 14
S14 . Partner using credit of firm for private purposes Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he is, in fact, specially authorised by the other partners; but this section does not affect any personal liability which may arise...
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