DOCTRINE OF HOLDING OUT

NAME: S.SAI PRANITHA

ID: 2200570033
COURSE: LAW OF CONTRCATS- ll
COURSE CODE: 22BL12C4
Introduction

The Doctrine of holding out partnership goes back to the Partnership Act
of 1890. This is also called the partnership as the estoppels. The liability
of every person goes to the firm individually, but there is the formation
of the third-party liability to the firm since the principle of the
estoppel is applicable to the doctrine of holding out. Under the
governance of the partnership Act, 1932 and the general rules and
principles of the contract the partnership takes place with a contract.
The doctrine of holding out is basically giving a false impression to the
other person making the other person believe that the other person is
still the partner at the company and holds the authority in the name of
being the partner at the company and makes an agreement with the
other person though he or she is not at the same position actually.
Liability of Holding Out
Section 28 of the Partnership Act, 1932 is as:
Anyone who by words spoken or written or by conduct represent himself, or
knowingly permits himself to be represented, to be a partner in a firm, is liable as
a partner in that firm to anyone who has on the faith of any such representation
given credit to the firm, whether the person representing himself or represented
to be a partner does or does not know that the representation has reached the
person so giving credit.

Where after partner's death the business continued in the old firm-name, the
continued use of that name or of the deceased partner's name as a part thereof
shall not of itself make his legal representative or his estate liable for any act of
the firm done after his death.
Doctrine of holding out basically refers to an act or omission of the act which led others
to believe that the person is a partner of the company and has authority and hence in
this faith they made an agreement while in actual he does not have. Hence in such
cases section 28 states that if a person has represented himself as a partner of the
business and the other party had made some transaction in this faith, he cannot now
go back and hence is estopped to be liable as a member as he presented himself.

This partner by holding out is therefore liable to compensate and make good the loss
the third party, whom he induced by being misrepresenting himself as partner, has
suffered due to him but does not by anyway gets a right of being a real -partner in the
firm.

Example:
A introduced B as his partner to C. And B even after knowing that he is not a partner let
A misrepresent him and C believing on this fact make a deal or transaction with A. B
now hence cannot get back and will be liable in the capacity of being a partner (though
he is not) by estoppel and will be liable by holding out to C.
How Is Liability Of Holding Out Different From
Law Of Estoppel In Partnership

A partner by estoppel is almost similar to a partner by holding out

though sometimes it is differentiated on a small point. A partner by
estoppel by his action represents himself as the partner of the business
or the firm and hence they cannot latter escape from the liability as a
partner to the person who acted on their representation.

In case of liability by holding out it is the firm or business that allows

and lets the person to misrepresent himself as the partner and the third
party to believe on the fact. But this by no means, that the person can
be a partner of the firm or business but will only be liable as a partner
for his misrepresentation for the transaction that resulted because of
his act/omission. Moreover, the doctrine of liability of holding out has
three exceptions to it whereas there lies nothing such in a partner by
estoppel.
Essentials Of Holding Out

There are two main essential ingredients or elements that are required to hold a
person liable as a partner by doctrine of holding out. These main requirements are
in itself interpreted or understood from the Section 28 of Partnership Act, 1932. The
two essentials are:
There Must Be A Representation

There must be an express or implied representation by the person to the

third party which makes the third party believe that he is a partner of the
firm/ business. The representation can be oral or written or implied by the
conduct. The representation can be made by the person himself showing
him expressly as a partner or by letting the firm/business to represent
him a partner by omitting himself from stating the true facts.

In the case of Martyn v. Gray, the defendant was held liable by holding
out as he let the third party believe that he was a partner by remaining
silent when the business/firm itself misrepresented the defendant as a
partner.
2. Knowledge Of Representation And Acting On It
In Good Faith
The second important essential requirement is knowledge of the
representation (basically misrepresentation) to the plaintiff. The plaintiff
who is making the defendant liable must have knowledge of the
representation and has acted on it (to make the deal or the transaction)
believing on the fact.
To make the defendant liable it must be proved that either he himself
represented himself as a partner of the firm to the plaintiff or otherwise
has made such public representation by act or conduct that makes a
person think that he too is a partner in the business.

If the plaintiff has believed on the representation and fact and has acted
on it in good faith, it is immaterial whether the defendant knows it or
not, he can be charged and is liable to the plaintiff by holding out as a
partner. But if the plaintiff has not heard about any such representation
or if heard and did not believe it to be true or real or did not act as a
result of this representation then he cannot charge the person and he
cannot be held liable.
Scarf V. Jardine

Facts:
Scarf and Rogers were two partners of the firm. They conducted the
business smoothly but a little latter, Scarf retired. Beach joined Rogers and
replaced the retired Scarf and the business continued as it was. There was
no public notice made of Scarf being no longer a partner or his retirement
neither any official notice was circulated to recognize Beach as a new
partner.

The whole change was left internal and was not informed to the customers
or other suppliers, etc. and was not made public or conveyed to any other
person. Jardine was an old supplier to the company and supplied the
ordered goods without knowing about the change of partners. He came to
know about this later when he thought to sue the company as they did not
pay him dues for his goods. He sued the new company which later went
bankrupt and hence could not pay him. So, Jardine later sued the earlier
partner Scarf.
Judgment:
It was held that Scarf was not liable to pay the dues to Jardine. The court
said that Jardine had a right to sue the company/firm along with Scarf in
the first instance itself as he was unaware of the new firm (partners)
when he had made the deal of the goods but later when he comes to
know about the changed partners and still chooses to sue the new firm,
now he cannot say that he was not aware of the change. Had he sued
Scarf in the first instance, Scarf would have been liable as Jardine was
unaware of him being retired and hence has supplied goods under the
impression of Scarf being a partner.

The court held that a novation of contract may either involve same
parties and change in contract or same contract and change in parties.
And in the present case, an implied agreement is made as Jardine after
knowing about the change of the partners chooses to sue the new firm
(Rogers and Beach and not Scarf) and hence he stays on the part of same
contract with different parties and hence looses his right to sue Scarf (a
retired partner) or the older firm for that matter as it will be against the
Partnership Act.
Exceptions To The Rule Of Holding Out

Section 28 of the Partnership Act,1932 provides for the Liability of

Holding out to sue the partner (who is not be a actual partner of the
firm/business) but the doctrine is not absolute and there are some
exceptions to it. The two essentials of representation and knowledge
of representation and act on it in good faith may be directly or
indirectly assumed to be fulfilled but there are still some exceptions
where the principle or the rule cannot be applied and hence such a
represented partner cannot be held liable.

The main three exceptions are

1. Deceased Partner:
The doctrine of liability by holding out is not applicable to a person
who is no longer alive or is dead. This because a death is in itself a
notification that the person no longer exists and hence no longer a
partner and so cannot be sued.
Venkatasubbamma v. Subba Rao

In this case this principle was reaffirmed that a dead person/ partner
cannot be held liable for the acts or transaction/ deal done by the other
partners. The heirs of the deceased too cannot be made liable for the
contracts signed by the other partners after the death of the deceased
but may be for the already made contracts.

2.Insolvent Partner:
Insolvency of a partner too is a notice by itself. A partner ceases to be a
partner of the business/ firm from the date he is declared an insolvent
and hence is no longer liable for any of the contracts or transactions
made by other partners after the insolvency of the particular partner.
Insolvency is itself a public notice and no separate public notice is needed
to show the dissolution of the partner from the business to prevent him
from any further liabilities by holding out.
3. Dormant Partner:
A dormant or sleeping partner is a partner who does not actively
participates in the business or deals and can be inferred that he has
not taken part in the conduct of the firms and neither the customers
or the clients are aware of his role or participation as a partner. He
has just made the investment in the firm and shares the profits and
losses of the firm and agrees and is bounded by the activities of the
other active partners.

Such a partner if has remain such a dormant partner for a long time
then after his retirement a public notice is not necessary to prevent
him from the liability by holding out as he himself by his acts is
absolved. But if his existence and participation was known to some
customers or suppliers for that matter, a notice must be given to
them or he will be liable by holding out to such persons who believed
him to be a partner.
Conclusion
In partnership by holding out, a person intentionally represents
himself as a partner of the company or the firm and acts on
their name by making the party believe about his status in the
firm, and the person cannot deny his liability to the third party
afterward his actions are proved. Now if there’s any way
involvement of the firm is proved or the firm is aware of the
actions of such person and didn’t take any actions to stop such
representations, then the firm will also be liable for the actions.
Now, if a person is admitted by the means of holding out then
that person cannot claim the rights in the property of the firm or
the company.