Concept Overview: Understanding the Business Relationship
In the world of commerce and law, people often work together to conduct business, share profits, and manage responsibilities. Two such important legal relationships are Partnership and Agency. Both arise out of contracts, involve mutual confidence, and have overlapping features — yet they are distinct in nature and scope.
While a Partnership involves mutual ownership and shared profits among partners, Agency is primarily about representation — where one person (the agent) acts on behalf of another (the principal). Understanding these distinctions is crucial because it affects rights, liabilities, and the extent of authority in business dealings.
This essay defines “Partnership” under Indian law, analyzes its essential features, and clearly distinguishes it from the “Contract of Agency”, with practical examples and an easy mnemonic to remember the key points.
Definition of Partnership under Indian Law
Section 4 of the Indian Partnership Act, 1932 defines Partnership 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 three key elements:
- Agreement between persons;
- Sharing of profits; and
- Business carried on by all or any of them acting for all (mutual agency).
A Partnership arises out of a valid agreement, not from status or birth. The persons entering into such an agreement are known as partners, the collective group is called a firm, and the name under which the firm carries on business is known as the firm name.
Thus, partnership is not merely a profit-sharing association but a contractual relationship where each partner acts as both a principal and an agent for the firm. The core feature of partnership is mutual agency, meaning each partner’s act binds all others.
Essential Elements of a Partnership
- Contractual Relationship:
A partnership arises only through an agreement, either oral or written. It cannot exist by operation of law or inheritance. - Existence of Business:
The relationship must be for carrying on a lawful business — not for charitable or social purposes. - Sharing of Profits:
The partners must agree to share profits (and by implication, losses). However, profit sharing alone does not create a partnership. - Mutual Agency:
The principle of mutual agency — that every partner is an agent of the firm and the other partners — is the most essential feature distinguishing partnership from other business forms. - Number of Partners:
Under Indian law, the maximum number of partners is 50 in general business and 10 in banking (as per Companies Act, 2013).
Thus, partnership is a mutual and fiduciary relationship where all partners jointly manage and represent the business.
Meaning and Nature of Agency
According to Section 182 of the Indian Contract Act, 1872,
“An ‘agent’ is a person employed to do any act for another or to represent another in dealings with third persons.”
Here, the person for whom such act is done or who is represented is called the principal.
The core of agency lies in representation, where the agent acts within the scope of authority conferred by the principal. The agent does not share profits or ownership in the principal’s business; rather, the agent’s duty is to act on behalf of the principal and earn commission or remuneration for services rendered.
Thus, an agency creates a relationship where the principal is bound by the lawful acts done by the agent within the limits of authority, under the maxim “Qui facit per alium facit per se” (he who acts through another does the act himself).
Distinction Between Partnership and Agency
Although partnership and agency are closely related — because each partner is also an agent of the firm — they differ in several fundamental aspects. The following points explain these distinctions clearly:
| Basis of Difference | Partnership | Agency |
|---|---|---|
| Definition | Partnership is a relationship between persons who agree to share profits of a business carried on by all or any of them acting for all (Sec. 4, Partnership Act). | Agency is a relationship where one person (agent) acts on behalf of another (principal) (Sec. 182, Contract Act). |
| Number of Persons | Requires at least two partners. | Can exist between two persons only — principal and agent. |
| Interest in Business | Partners have a joint interest and share in profits and losses. | Agent has no ownership interest, only acts for remuneration. |
| Creation | Created by a contract of partnership. | Created by a contract of agency or even impliedly by conduct. |
| Authority | Each partner is both a principal and an agent for others. | The agent is only an agent, not a principal. |
| Ownership of Property | Property belongs to the firm collectively. | Property belongs to the principal only. |
| Liability | Partners are jointly and severally liable for firm debts. | Principal is solely liable for acts of the agent done within authority. |
| Termination | Dissolution of firm ends partnership. | Agency ends with completion, revocation, or death of principal/agent. |
From this, it is evident that every partner is an agent, but every agent is not a partner. Partnership is a broader business relationship that inherently contains elements of agency, but not vice versa.
Real-Life Example
Let’s take an example for better understanding:
Example 1 – Partnership:
A, B, and C decide to start a textile business together, agreeing to invest capital and share profits equally. They sign a partnership deed stating that any partner can enter into contracts on behalf of the firm. Here, their relationship constitutes a partnership under Section 4 of the Indian Partnership Act. Each partner acts as both a principal and an agent for the others.
Example 2 – Agency:
On the other hand, if A appoints B to sell fabrics on his behalf and pays him a commission on each sale, it constitutes an agency relationship. B is not a co-owner of the business; he merely represents A and earns a commission.
This shows that while agency involves representation of one by another, partnership involves co-ownership and shared liability.
Judicial Interpretation
In Cox v. Hickman (1860), the English court held that the sharing of profits alone does not constitute a partnership; the true test is mutual agency — whether a person acts as an agent for others in carrying on the business.
Similarly, in M/s Champaran Cane Concern v. State of Bihar (1963), the Indian Supreme Court emphasized that mutual agency is the real test of partnership. This judicial view strengthens the distinction between a simple profit-sharing arrangement and a legal partnership.
Mnemonic to Remember – “P.A.R.T.N.E.R.”
Use the mnemonic P.A.R.T.N.E.R. to recall the key distinctions between Partnership and Agency:
- P – Profit-sharing exists in partnership, not in agency.
- A – Agreement forms the basis of both, but purpose differs.
- R – Representation only in agency; mutual agency in partnership.
- T – Two persons in agency, two or more in partnership.
- N – No ownership in agency, joint ownership in partnership.
- E – Equal liability in partnership; principal liable in agency.
- R – Relationship ends differently — dissolution vs. termination.
Mnemonic Sentence:
“Partners Always Represent Themselves, Not Each Employer’s Role.”
This helps you remember that in partnership, representation is mutual — partners act for themselves and others — while in agency, the agent acts solely for the principal.
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