Narrate the essential element of partnership firm in detail.

Define Agent & Principal. Explain the general rules of

agency

Essential Elements of Partnership:

The definition of partnership itself reveals certain characteristics of partnership.
These are:

1) Association of two or more persons: There must be at-least two persons to

form a partnership. Regarding maximum number, Companies Act, 1956
provides that where the firm is carrying on banking business, the number of
partners should not exceed 10 and where the firm is carrying on any other
business, the number of persons should not exceed 20.

2) An Agreement or Contract : Partnership is the result of a contract. It does

not arise from status, operation of law or inheritance. This is an important
feature that distinguishes it from various other relations which arise by
operations of law and not from an agreement.v

For example, at the death of father, who was a partner in a firm, the son can
claim share in the partnership property but cannot become a partner. All the
essential elements of a valid contract must be present in a partnership
agreement. Section 5 provides that ‘the relation of partnership arises from
contract and not from status’. The agreement need not be a formal or written
agreement.

3) Business: Partnership is formed to carry on some business. The term

‘business’ includes every trade, occupation and profession [Section 2 (b)].
The idea behind the business is to secure gain. Thus, if the purpose is to
carry on some charitable or religious work, it will not be partnership.
4) Sharing of profits: The division of profits of a business is an essential
element for the existence of partnership. Sharing of profits involves sharing
of losses also, But sharing need not be equal. Partners can mutually agree to
share profits in any way they like. But sharing of profits only does not make
anyone a partner. It is only prima facie evidence of the existence of a
partnership.

The conclusive test is that of mutual agency. Firm the above, it can be
concluded that a servant or an agent who receive share of profit as his
remuneration, a seller of goodwill of a business who is getting a share of
profit as consideration for sale of goodwill is not by reason of such facts
alone, partners.

5) Mutual agency: This is the most essential principle of partnership. The

partnership business may be carried on by all the partners or any (one or
more) of them acting for all. Each partner is the agent of the firm as well as
other partners.
He can bind the firm by his acts done in the usual course of business.
Similarly, a partner may be bound by the act of the other partners. Thus, the
question whether a person is or is not a partner depends on whether he can
bind others by his act or be bound by the act of others.
Definition of Agent
Agency is the legal relationship between an Agent and Principal. In a contract of
Agency, a person appoints another person to act on his behalf with a third party.
The person who appoints another person is called 'Principal' and the person, who
is appointed, is called 'Agent'

For example, 'A' appoints 'B' to buy 50 bags of Wheat on his behalf, Here 'A'
is Principal and 'B' is Agent. The relation between 'A' and 'B' is called Agency.

Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do

any act for another or to represent another in dealing with third persons.

Who is a Principal?
According to Section 182, The person for whom such act is done, or who is so
represented, is called the “principal”. Therefore, the person who has delegated his
authority will be the principal.

Illustrations

A, a businessman, delegates B to buy some goods on his behalf. Here, A is

the principal and B is the agent, and the person from whom the goods are bought is
the ‘Third Person’.
Essentials of a Contract of Agency:
An agreement: The agreement between the principal and agent is the first
requirement of a contract of agency. The agreement may be express or implied.

Competency of principal: It is another important essential element of a valid

agency. Section 183 provides that any person who is of the age of majority
according to the law to which he is subject, and who is of sound mind, may employ
an agent. Thus, a minor or a person of unsound mind cannot appoint an agent. But
any person can be an agent (even a minor or person of unsound mind).

In such cases the incompetent person shall not be liable for his acts to the principal.

No Consideration is necessary: Section 185 provides that no consideration is

required to create an agency. So although consideration is necessary in every
contract, law specially provides that consideration is not necessary to create
agency.

General Rules of agency:

The law of agency is based on the following two general rules:

1) The principal is bound by the acts of his agent and can get the benefit of
such acts as if he had done them himself. The acts of the agent shall, for all
legal purposes, be considered to be the acts of the principal.

2) Whatever a person can lawfully do himself, he may also do the same

through an-agent except in case of contracts involving personal services
such as painting, marriage, etc.