Partnership as a Legal Relationship
In the world of business, partnership is one of the oldest and most flexible forms of business organization. A partnership allows two or more individuals to come together and carry on a business with the goal of earning profits. Under Section 4 of the Indian Partnership Act, 1932, partnership is defined as:
“The relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
This definition highlights two essential aspects of a partnership — mutual agency and profit-sharing. The principle that “a partner is the agent of the firm for the purpose of the business of the firm” lies at the very heart of this definition. It means that each partner not only acts on his or her own behalf but also represents the entire firm and the other partners in all matters related to the partnership business.
Legal Basis under the Indian Partnership Act, 1932
The concept that a partner acts as an agent of the firm is explicitly recognized in Section 18 of the Indian Partnership Act, 1932, which states:
“A partner is the agent of the firm for the purposes of the business of the firm.”
Further, Section 19(1) adds that the act of a partner done to carry on the usual business of the firm binds the firm, provided it is done in the firm’s name or on behalf of the firm.
Thus, the law clearly establishes that a partnership firm does not have a separate legal personality from its partners (except in limited liability partnerships). Instead, it operates through the collective agency of its partners. Every act done by a partner in the ordinary course of business binds the firm and all other partners, just as an agent’s act binds his principal under the Law of Agency (Indian Contract Act, 1872, Section 182).
Nature of the Agency Relationship in a Partnership
The principle of mutual agency is what differentiates a partnership from other business associations like co-ownership or joint ventures. Each partner plays a dual role — he is both a principal and an agent:
- As an Agent:
A partner can bind the firm and other partners by his actions done within the scope of the firm’s business. - As a Principal:
Each partner is bound by the acts of the other partners performed in the firm’s ordinary course of business.
This mutual agency ensures that every partner is equally responsible for the acts of the others, and every partner benefits from the collective efforts of the group.
For example, if a partner purchases raw materials for the firm or signs a business contract, the other partners cannot deny liability if such acts were within the usual business of the firm.
This is why mutual agency is the true test of partnership — even if there is profit-sharing, the absence of mutual agency would mean the relationship is not one of partnership.
Implied Authority of a Partner
Under Section 19(1) of the Indian Partnership Act, 1932, a partner’s authority to act on behalf of the firm is implied. This means a partner has the power to do acts necessary to carry on the usual business of the firm. The implied authority extends to all partners, but it must relate to the ordinary course of the business.
Some examples of a partner’s implied authority include:
- Buying and selling goods on behalf of the firm.
- Borrowing money for business needs.
- Receiving payments and issuing receipts.
- Hiring employees or entering into contracts necessary for the firm’s functioning.
However, Section 19(2) lists acts beyond implied authority, unless there is express consent from the other partners. These include:
- Submitting disputes to arbitration.
- Opening bank accounts in one’s personal name.
- Transferring immovable property.
- Admitting liability in a suit.
- Compromising or relinquishing firm claims.
Thus, while each partner is an agent of the firm, his powers are limited to acts done in the ordinary course of business unless authorized otherwise.
Effect of Partner’s Acts on the Firm
According to Section 22 of the Indian Partnership Act, 1932, in order for a partner’s act to bind the firm:
- The act must be done in the firm’s name, or
- It must be done in a way that shows an intention to bind the firm.
For instance, if a partner signs a contract or a bill of exchange in his own name without mentioning the firm, the firm may not be held liable unless it is proved that he was acting on behalf of the firm.
The acts of a partner thus legally bind:
- The firm as a whole,
- All other partners, and
- Third parties who deal with the firm in good faith.
Extent of Liability
The liability arising out of a partner’s agency is joint and several. Under Section 25 of the Act, every partner is jointly and severally liable for all acts of the firm done while he is a partner. This means that a third party can sue either all partners together or any one of them separately for the entire amount of the firm’s liability.
For example, if a partner takes a business loan for firm operations and defaults, the creditor can sue any partner for full repayment, even if that partner had no direct role in the loan transaction. Later, the sued partner can recover the proportionate share from the others.
This collective responsibility promotes trust and accountability within partnerships and among third parties dealing with them.
Real-Life Example
Let’s consider a practical situation.
Example: Three friends — Rohan, Meera, and Anil — start a textile firm named “RMA Textiles.” Rohan, without consulting others, enters into a contract to purchase fabric from a supplier in the firm’s name. Later, the firm uses the fabric and profits from it.
Even though Meera and Anil were unaware of the transaction, the supplier can legally hold all three liable for payment because Rohan acted within the implied authority as a partner in the ordinary course of the business.
This example clearly shows that a partner acts as an agent of the firm, and his actions, if done in the firm’s name, bind all partners.
Judicial Precedents
- Cox v. Hickman (1860):
The House of Lords held that the true test of a partnership is mutual agency — not profit-sharing. Partners are agents for one another in all business matters. - Raghunandan v. Hormasji (1956):
The court reaffirmed that every partner can bind the firm by acts done within the ordinary scope of business, even if the other partners did not personally participate. - Pannalal v. Firm of Omkarmal (1932):
The court held that a partner’s fraudulent act also binds the firm if it is within the course of the firm’s business.
These cases demonstrate that mutual agency is the defining feature of partnership law.
Mnemonic to Remember the Rule — “A-G-E-N-T”
Use the mnemonic A-G-E-N-T to easily remember that a Partner is the Agent of the Firm:
- A – Acts on behalf of firm: Partner represents the firm in all business matters.
- G – General authority: Can do all acts in the usual course of business.
- E – Express and implied authority: Power can arise by agreement or by implication.
- N – Notice binds all: Any notice to one partner binds the firm.
- T – Third-party dealings: Third parties can rely on acts done in the firm’s name.
Mnemonic Sentence:
“All Good Entrepreneurs Need Trust.”
This phrase reminds you that every partner is an agent of the firm and acts for all — the foundation of partnership law under Section 18 of the Indian Partnership Act, 1932.
About lawgnan:
To understand the Partnership as a Legal Relationship and master the concept that “a partner is the agent of the firm” under Section 18 of the Indian Partnership Act, 1932, visit Lawgnan.in. Lawgnan offers detailed, exam-oriented LLB notes with simplified explanations, case laws, and key sections. Learn how mutual agency, implied authority, and joint liability shape business partnerships. Whether you’re preparing for law exams or want clarity on partnership law, Lawgnan provides concise, reliable, and easy-to-remember resources to strengthen your legal knowledge and help you score higher in exams. Explore now at Lawgnan.in.
