What is Implied Authority of a Partner?
Implied Authority of a Partner
1. Authority of a Partner:
The
Authority of a partner to bind the firm in the context of third parties may be
express or implied.
Express Authority:
Authority
is said to be express when it is given by words, spoken or written. Thus, the
authority conferred on a partner by mutual agreement is called an express
authority. The firm is bound by all acts of a partner done within the scope of
his express authority, notwithstanding that the acts are beyond the scope of
the partnership business.
Implied Authority:
Also
known as ostensible or apparent authority, implied authority is derived from
either usage of trade, conduct of parties, or statute. It arises by implication
of law and is not conferred by express agreement among the partners.
1.1. Doctrine and Scope of Implied Authority:
Section
19 provides, ‘Subject to the provisions of Section 22, the act of a partner
which is done to carry on, in the usual way, business of the kind carried on by
the firm, binds the firm’. However, Section 22 reads, ‘In order to bind a firm,
an act or instrument done or executed in the firm name, or on any other manner
expressing or implying an intention to bind the firm’. Accordingly, for an act
to be deemed as one with implied authority it is necessary that
·
the act done by the partners must relate to
the normal business of the firm (Example 1),
·
the act must have been done in the usual way
of carrying on the firm’s business (Example 2), and
·
the act must be done in the name of the firm
and in some manner indicating an intention to bind the firm (Example 3).
1.2. Examples:
2. A, B,
and C are in partnership. Their firm deals in readymade garments. X, a
retailer, purchased goods worth Rs. 1000 on credit. Later on, A collected the
amount due from X on behalf of the firm and utilized the sum for his personal
use. B and C are not aware of this receipt. Here the firm cannot claim the
amount from X on the plea that A had no authority to collect the amount.
Collecting and receiving money from debtors is an act done in the usual course
of business.
3. A and B are partners in a building construction business. A goes to a raw
material supplier and purchases on credit certain quantity of cement in the
firm’s name. He utilizes this cement to construct his own house. This act will
bind the firm because such kind of act is usually done in the construction
business and is done in the firm’s name.
2. Acts within the implied authority of partner:
Subject
to the limitations mentioned above, every partner has an implied authority to
bind the firm by the following acts, i.e., the implied authority of a partner
shall normally include
1) Selling
firm’s goods;
2) Buying
on behalf of the firm, goods in which the firm deals or which are used in the
firm’s business;
3) Receiving
payments of the debts due to the firm and giving valid receipts for them;
4) Engaging
and discharging employees;
5) Pledging
movable property or goods of the firm as security for the purpose of getting
loans;
6) Drawing,
accepting, and endorsing negotiable instruments in the name of the firm; and
7) Employing
solicitor or attorney on behalf of the firm to defend action against it.
3. Acts outside the implied authority of partner:
Certain
acts have been statutorily excluded from the scope of implied authority of a
partner. A partner, therefore, cannot bind the firm by such acts unless the
usage or custom of trade permits him/her. According to Section 19(2), which has
restricted the scope of implied authority of a partner, in the absence of any
usage or custom of trade to the contrary, the implied authority of a partner
does not empower him/her to do the following:
1) Submit
a dispute relating to the business of the firm to arbitration,
2) Open
a bank account on behalf of the firm in his own name,
3) Compromise
or relinquish any claim or portion of a claim by the firm,
4) Withdraw
a suit or proceeding filed on behalf of the firm,
5) Admit
any liability in a suit or proceeding against the firm,
6) Acquire
immovable property on behalf of the firm,
7) Transfer
immovable property belonging to the firm, or
8) Enter
into partnership on behalf of the firm. [Section 19(2)].
However,
the partners by mutual agreement can extend or limit the implied authority of
any partner [Section 20].
Source: Legal Aspects of Business, 3e by Ravinder Kumar.
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