Page 166 - DMGT407Corporate and Business Laws

Unit 6: Partnership Act and Limited Liability Act

Notes
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Caution There is no difference between active partners and dormant partners as regards
liability to third parties. A dormant partner is also liable to an unlimited extent for all the
debts of the firm.

6.5.4 Liability of a Firm for Wrongful Acts of a Partner (Ss.26-27)

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business
of a firm, or with the authority of his partners, loss or injury is caused to any third party or any
penalty is incurred, the firm is liable therefor to the same extent as the partner.
Also, the firm is liable to make good the loss where – (i) a partner acting within his apparent
authority receives money or property from a third party and misapplies it, or (ii) a firm, in the
course of its business, receives money or property from a third party and the money or property
is misapplied by any of the partners while it is in the custody of the firm.

6.5.5 Implied Authority and Third Parties

The provisions concerning how far third parties are affected by the implied authority, its extension
and curtailment are summarised at one place for the convenience of the reader.
(i) Extension and restriction of a partner’s implied authority: Section 20 provides that the
partners may, by contract between them, either extend or restrict the implied authority of
any partner. In spite of any such restriction if a partner does, on firm’s behalf, any act
which falls within his implied authority, the firm will be bound unless the person with
whom he is dealing is aware of the restriction or does not know or believe the partner to
be a partner. Also a third party is not affected by a secret limitation of a partner’s authority
unless he has actual notice of it.
(ii) Acts in emergency: Section 21 provides that a partner can bind the firm by all his acts done
in an emergency, with a view to protecting the firm from any loss, provided he has acted
in the same manner as a man of ordinary prudence would have acted in the like
circumstances. However, such acts bind the firm but do not form part of the partner’s
implied authority.
(iii) Effect of admission by partners: Section 23 provides that partners can make binding
admission in relation to partnership transactions made in the ordinary course of business.
Such an admission by a partner is evidence against the firm. An admission or representation
by a partner will not, however, bind the firm if his authority on the point is limited and
the other party has knowledge of the restriction.

(iv) Effect of notice to an acting partner: Section 24 provides that a partner who habitually acts
in the business of the firm on any matter relating to the affairs of the firm operates as
notice to the firm except in the case of a fraud on the firm committed by or with the consent
of that partner.
(v) Liability of a partner for acts of the firm: Every partner is liable jointly with all the other
partners and also severally, for all acts of the firm done while he is a partner (s.25).
(vi) Liability of the firm for wrongful acts of a partner: Section 26 provides that the firm is
liable to the same extent as the partner for any loss or injury caused to a third party by the
wrongful acts or omission of a partner, if they are done by the partner while acting (a) in
the ordinary course of the business of the firm, or (b) with the authority of the partners.
This section makes the firm liable for the torts committed by a partner.

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