In partnership law, every partner is both a principal and an agent. Under Section 18 of the Indian Partnership Act, 1932, a partner is an agent of the firm for the purposes of the business of the firm.
This agency creates Implied Authority, which allows a partner to bind the firm by their actions without needing express written permission for every single transaction.
1. The Scope of Implied Authority (Section 19)
The authority of a partner to bind the firm is called "implied authority" if the act is done in the usual way of the business carried on by the firm. For an act to fall under implied authority, it must meet three conditions:
The act must relate to the normal business of the firm.
The act must be done in the usual manner of such business.
The act must be done in the name of the firm or in a way that shows an intention to bind the firm.
Common examples of Implied Authority:
Purchasing or selling goods in which the firm deals.
Receiving payments and issuing receipts on behalf of the firm.
Engaging or dismissing servants/employees for the firm's business.
In a trading firm, borrowing money, drawing, and endorsing negotiable instruments (like cheques or bills of exchange).
2. Statutory Restrictions (Section 19(2))
The Act specifies certain acts that a partner cannot do under implied authority. These require the unanimous consent of all other partners. Unless there is a specific usage of trade or contract to the contrary, a partner cannot:
Submit a dispute relating to the business of the firm to arbitration.
Open a banking account on behalf of the firm in their own name.
Compromise or relinquish any claim or portion of a claim by the firm against a third party.
Withdraw a suit or proceeding filed on behalf of the firm.
Admit any liability in a suit or proceeding against the firm.
Acquire immovable property on behalf of the firm.
Transfer immovable property belonging to the firm.
Enter into a partnership on behalf of the firm with a third party.
3. Extension and Restriction by Agreement (Section 20)
Partners can enter into a contract to extend or restrict the implied authority of any partner.
Internal Restrictions: If the partners agree that a specific partner cannot perform a certain act (e.g., "Partner A cannot sign cheques over ₹50,000"), this is a valid internal restriction.
Effect on Third Parties: Such a restriction is only binding on a third party if:
The third party knows about the restriction.
The third party does not know or believe the person to be a partner.
If a third party is unaware of the internal restriction and the act falls within the "usual" scope of the business, the firm remains liable for that partner's actions.
4. Acts in Emergency (Section 21)
A partner has the authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence in their own case. Such acts bind the firm even if they fall outside the partner's standard implied authority.
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