Chapter 20

RIGHTS, DUTIES AND LIABILITIES OF

PARTNERS

A partnership comes into existence by

an agreement and such an agreement
usually provides for mutual rights and
duties and liabilities of the partners.
 Learning Objectives
Mutual Relations between Partners: rights and duties

Partners’ Relations with Third Parties; Authority of Partners

Liabilities of Partners: for acts of firm; wrongful acts of partners

Liability of the firm for misapplication by partners

Reconstitution of a Partnership Firm: Admission of a new partner;

Retirement, Death, or Insolvency of a Partner

Property of the Firm

Transfer of Partner’s Interest in the Firm

 MUTUAL RELATIONS BETWEEN PARTNERS

Subject to the provisions of this Act, the mutual rights

and duties of the partners of a firm may be
determined by contract between the partners, and
such contract may be expressed or may be implied by
a course of dealing. Such contract may be varied by
the consent of all the partners, and such consent may
be expressed or may be implied by a course of dealing.
[Section 11(1)
Thus, the mutual rights and duties of partners will be
determined only by the provisions made in the
agreement, apart from the cases where the Act has
mandatory provisions that are binding on all the
partners. These are contained in Sections 9 and10 and
cannot be altered by individual agreements.
 Rights of Partners
Unless agreed otherwise, the Act confers the following rights upon the
partners of a firm:
1. Right to take part in the conduct of business Every partner has an
inherent right to take part in the conduct and management of the affairs
of the business of the firm. [Section 12 (a)]
2. Right to be consulted. Every partner has a right to be consulted and
heard in all the matters affecting the business of the firm. Any
divergence arising as to ordinary matters connected with the business
may be decided by a majority of the partners. But no change may be
made in the nature of the business or constitution of the partnership
without the consent of all the partners. [Section 12 (c)]
3. Right of access to books. Every partner, whether active or dormant, has
a right of access to all the records, books and accounts of the business
and also to inspect and copy them. [Section 12 (c)]
4. Right to share profits equally. Every partner, irrespective of the amount
of capital contribution or business expertise, is entitled to a share in the
profits of the business equally. [Section 13 (b)]
Contd.
 ….Rights of Partners

5. Right to claim interest on capital [Section 13 (c)]. Usually no interest is

allowed on the capital contributed by the partners. But where a partner is
entitled so through the partnership deed, such interest shall be payable
out of profits. If there are losses, the interest on capital will not be
allowed.
6. Right to interest on advances [Section 13 (9d)]. Where a partner has
made, for the purpose of the business, any payment or advanced some
amount as loan to the firm, he will be entitled to interest at a rate agreed
upon, and where no rate is stipulated, at six per cent per annum. Interest
on loan will be payable despite the losses being suffered by the firm.
7. Right to be indemnified [Section 13 (e)] . Every partner has a right to be
indemnified by the firm in respect of payments made or liabilities incurred
by him under the following circumstances:
• in the ordinary and proper conduct of the business and
• in doing such act, in an emergency, for the purpose of protecting the firm
from loss, as would be done by a person of ordinary prudence in his own
case under similar circumstances. Contd.
 ….Rights of Partners

8. Right to use partnership property. Every partner is, as a rule, a joint owner
of the partnership property and is entitled to have held and applied
exclusively for the purposes of partnership business. [Section 15]
9. Right in emergency. A partner has the power in an emergency to do all
such acts as are reasonably necessary for protecting the firm from losses.
[Section 21]
10. Right to prevent admission of a new partner. Every partner is entitled to
prevent the admission of a new partner into the firm without his/her
consent. [Section 21]
11. Right to retire. Every partner has a right to retire by giving notice where
the partnership is at will, or with the consent of all the partners in case of
a particular partnership. [Section 32(1) (c)]
12. Right not to be expelled. Every partner has a right to continue in the
partnership and not to be expelled from it. But the power to expel may be
conferred by express agreement. In such a case the power should,
however, be exercised in good faith. [Section 33(1)]
Contd.
 ….Rights of Partners

13. Right to carry on competing business. An outgoing partner may carry on

a business competing with that of the firm and he may advertise such
business. But he cannot seek to do the following:
• using the firm’s name
• representing himself as carrying on the business of the firm, or
• Soliciting the firm’s customers. [Section 36]
14. Right to share profits subsequent to retirement Unless otherwise
agreed, an outgoing partner is entitled to share profits of the firm or
claim interest at the rate of six per cent per annum on the amount of his
share in the property of the firm if the other partners continue the
business of the firm without any final settlement of accounts with the
outgoing partner. This rule is also applicable in the case of death of a
partner. [Section 37]
15. Right to dissolve the firm A partner has the right to dissolve the
partnership with the consent of all the partners. But where the
partnership is at will the firm may be dissolved by any partner giving
notice in writing to all other partners of his intention to dissolve the firm.
[Section 40]
 Duties of Partners
The duties of partners’ inter-se may broadly be classified into two heads:
• Absolute duties, and
• Duties subject to agreement by partners
Absolute duties
These duties are mandatory in nature and are binding on all the partners. Following
are the absolute or mandatory duties of the partners:
1. Duty to carry on firm business to the greatest common advantage. Any partnership
is based on the doctrine of mutuality. Hence, each partner must act in good faith and
carry on the business of the firm for mutual benefit and not for solely personal gain.
Every partner must make the best use of his/her knowledge and skill while
conducting business so as to secure maximum benefit for the firm.
[Section 9]
A and B were partners in a firm of sugar refiners. A who had greater skill and
experience of buying sugarcane, was entrusted with the job of buying the same for
the firm. He supplied the sugarcane from his personal stock, which he had bought
earlier when the prices were low. He, however, charged the prevailing market price
and made secret profits for himself. It was held that the firm was entitled to those
profits and A must account to the firm for these private profits. A was negligent in his
duty to carry on the firm business to the greatest common advantage. Contd.
 ….Duties of Partners: Absolute duties

2. Duty to act in good faith An ideal partnership is based on mutual trust

and confidence among the partners. Every partner should act in good faith
and should be just and faithful to other partners. S/He should not deceive
the co-partners by concealment of material facts. [Section 9]
3. Duty to render true accounts . A partner is bound to keep and render
true, fair, and correct accounts of the firm to other partners. Each partner
should explain all the accounts kept by him to other co-partners and give
true and correct picture of the same. S/He should not attempt to make
private and secret profits at the expense of the firm. [Section 9]
4. Duty to provide full information. This duty is also based on the
fundamental principle of utmost good faith. As an agent of other partners,
every partner is bound to communicate full information of all things
affecting the business of the firm to co-partners. Thus, if a partner is in the
possession of material facts related to the partnership affairs, s/he should
not conceal that. [Section 9]
Contd.
 ….Duties of Partners: Absolute duties

5. Duty to indemnify for loss caused by fraud. Every partner

is bound to make good or compensate the loss suffered by
the firm due to his/her fraud in the conduct of the business
of the firm. The object of this provision is to discourage
partners to deal fraudulently in the conduct of the business.
It may, however, be noted that the firm and other innocent
partners shall remain liable to third parties for the fraud of
any one of them. But they can proceed to claim damages
against the partner who has committed fraud.
[Section 10]
6. Duty not to transfer one’s rights and interests. It is the
duty of every partner not to assign or transfer his/her rights
and partnership interests to an outsider so as to make that
person a partner in the firm. [Section 29]
Contd.
….Duties of Partners: Duties subject to agreement by partners

Subject to agreement among the partners, the Act lays

down the following duties of partners Inter-se:
1. Duty to attend diligently. Every partner is obligated to
attend diligently to his/her duties in the conduct of the
business of the firm. [Section 12 (b)]
2. Duty to work without remuneration. A partner is not
entitled to receive remuneration for taking part in the
conduct of the business. [Section 13 (a)]
3. Duty to share losses. In the absence of an agreement to
the contrary, every partner is bound to contribute to the
losses equally. An agreement to share profits implies an
agreement to bear the losses as well. [Section 13 (b)]
Contd.
….Duties of Partners: Duties subject to agreement by partners

4. Duty to indemnify for willful neglect [Section 12 (f)] A partner who

is guilty of willful neglect in the conduct of the business and if the firm
suffers loss in consequence, is bound to indemnify (make compensation
to) the firm and other partners. However, no partner will be liable for
mere error of judgment or for the acts, resulting in loss, done in good faith
without any mala fide intention.
A and B were partners. Their business was in dissolution. A being the
managing partner, the conduct of dissolution was left to him. He was
advised by B to dispose off certain bales of cotton (property of the firm)
immediately. But A insisted that these should be disposed off at the end of
the dissolution. By that time the prices of cotton fell down. Consequently
the goods realized much less than they would have otherwise. Here the
question was whether this loss was due to ‘wilful neglect’ of A or not. The
court of law held that this was not a case of wilful neglect as A had no
reason to anticipate sudden fall in prices . Contd.
….Duties of Partners: Duties subject to agreement by partners

5. Duty to hold and use property of the firm exclusively for the firm Subject to
contrary contract between the partners every partner must hold and use the
partnership property exclusively for the purpose of the business of the firm.
[Section 15]
6. Duty to account for personal profits Every partner must account for, and pay back
to the firm any profits derived by him/her for himself/herself from any transaction of
the firm, or from use of the firm’s property or through business connections of the
firm or firm name. [Section 16 (a)]
7. Duty to account for profits of a competing business. Normally there is no
restriction on a partner as to carry on any competing business. But if the partners
have agreed that no partner shall do any business, which is similar to or likely to
compete with the business of the firm, s/he should not carry on such business
without the consent of other partners. If s/he does that, s/he is bound to account for
and pay to the firm all profits made by him/her in that business.[Section 16 (b)]
8. Duty to act within authority. Every partner is bound to act within the scope of
his/her actual or apparent authority. If s/he exceeds that authority and other
partners do not ratify it, s/he shall compensate the co-partners for the loss suffered
on account of such acts. [Section 19(1)]
Contd.
 Authority of a Partner

The authority of a partner to bind the firm in the context of

third parties may be express or implied.
Express Authority . Authority is said to be express when it is
given by words, spoken or written. Thus, the authority
conferred on a partner by mutual agreement is called an
express authority. The firm is bound by all acts of a partner
done within the scope of his express authority
notwithstanding that the acts are beyond the scope of the
partnership business.
Implied Authority . Also known as ostensible or apparent
authority, implied authority is derived from either usage of
trade, conduct of parties, or statute. It arises by implication
of law and is not conferred by express agreement among
the partners.
 Doctrine and Scope of Implied Authority

Subject to the provisions of Section 22, the act of a partner

which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm.’ Whereas Section 22
reads, ‘In order to bind a firm, an act or instrument done or
executed in the firm name, or on any other manner expressing
or implying an intention to bind the firm. [Section 19]
Accordingly, for an act to be deemed as one with implied
authority it is necessary that:
• The act done by the partners must relate to the normal
business of the firm [Example 1]
• The act must have been done in the usual way of carrying on
the firm’s business [Example 2]
• The act must be done in the name of the firm and in some
manner indicating an intention to bind the firm.
Contd.
 ……Doctrine and Scope of Implied Authority

Example 1. A and B are in a partnership business of exporting foot

wears. B who is the managing partner places an order for a huge
quantity of cotton bales in the name of the firm. As this act does
not relate to the normal business of the firm, it will not fall within
the scope of implied authority. The firm, therefore, will not be
liable for it.
Example 2. A, B, and C are in partnership. Their firm deals in
readymade garments. X a retailer purchased goods worth Rs 1000
on credit. Later on, A collected the amount due from X on behalf
of the firm and utilized the sum for his personal use. B and C are
not aware of this receipt. Here the firm cannot claim the amount
from X on the plea that A had no authority to collect the amount.
Collecting and receiving money from debtors is an act done in the
usual course of business.
 Acts within the implied authority of a partner

Subject to the limitations mentioned above, every partner has an implied

authority to bind the firm by the following acts i.e., the implied authority
of a partner shall normally include:
1. Selling firm’s goods;
2. Buying, on behalf of the firm, goods in which the firm deals or which are
used in the firm’s business;
3. Receiving payments of the debts due to the firm and giving valid receipts
for them;
4. Engaging and discharging employees;
5. Pledging movable property or goods of the firm as security for the
purpose of getting loans;
6. Drawing, accepting and endorsing negotiable instruments in the name of
the firm;
7. Employing solicitor or attorney on behalf of the firm to defend action
against it (Bank of Australia vs Beriliat ) [Section 20]
 Acts outside the implied authority of a partner
[Section 19 (2)].
According to Section 19 (2), which has restricted the scope of
implied authority of a partner, in the absence of any usage or
custom of trade to the contrary, the implied authority of a partner
does not empower him/her to do the following:
1. Submit a dispute relating to the business of the firm to
arbitration;
2. Open a bank account on behalf of the firm in his own name;
3. Compromise or relinquish any claim or portion of a claim by the
firm;
4. Withdraw a suit or proceeding filed on behalf of the firm;
5. Admit any liability in a suit or proceeding against the firm;
6. Acquire immovable property on behalf of the firm;
7. Transfer immovable property belonging to the firm; or
8. Enter into partnership on behalf of the firm.
However, the partners by mutual agreement can extend or limit
the implied authority of any partner
 Partners’ Authority in an Emergency [Section 21]
A partner in an emergency and prescribes that ‘a partner has
authority, in an emergency, to do all such acts for the purpose of
protecting the firm from loss as would be done by a person of
ordinary prudence, in his own case, acting under similar
circumstances, and such acts bind the firm.
[Section
21]
Thus, to enforce a partner’s authority in an emergency the
following three requirements must be fulfilled:
1. there should be an emergency, i.e., a situation which requires
urgent action;
2. the act should be done to protect the firm from loss or damage
likely to be caused by such emergency; and
3. the nature of act should be such as would have been undertaken
by a prudent person in his/her own case under similar
circumstances.
 LIABILITIES OF PARTNERS

The liability of partners may be classified as follows:

• Liability of partners for acts of the firm
• Liability of the firm for wrongful acts of a partner
• Liability of the firm for misapplication by partners
Liability for Acts of the Firm [Section 25]
Every partner is liable, jointly with all the partners and individually ,
for all acts of the firm done while s/he was a partner. This is known
as liability of partners for the acts of the firm. Further, the liability
of all the partners is unlimited. By virtue of joint and several or
separate liabilities for every act of the firm, the third party can sue
each partner individually and also jointly with other partners.
Moreover, the act must have been undertaken in the ordinary
course of the business of the firm.
[Section 19 (1) and 22]
Contd.
 …..Liability of the Firm for Wrongful Acts of a Partner.
Where a partner, in the ordinary course of business, commits a wrongful
act and some loss or injury is caused to any third party, the firm is liable
for such an act. The wrongful act may be tort, fraud or negligence.
Section 10, however, provides protection to the firm in this regard stating
that, ‘every partner shall indemnify the firm for any loss caused to it by
his fraud in the conduct of the business of the firm.’ Thus, such loss will
be borne ultimately by the partner committing the fraud and cannot be
shared amongst all the partners. But in case loss is caused to third party
by tort (i.e., breach of duty) or due to negligence on the part of any
partner, all the partners shall be liable thereto.
[Section 26]
X, Y and Z are partners. The business of the firm is to publish magazines. X,
who is the editor of the magazine, allows the publication of a defamatory
article about an eminent person K, without confirming its validity. K in turn
sues the firm. The firm will be liable for this act of the editor partner as it
was committed in the ordinary course of business. Contd.
 …..Liability of the Firm by Misapplication by Partners

Where a partner acting within the scope of his apparent authority receives
money or property from a third party and misapplies it, or a firm in the course of
its business receives money or property from a third party, and that money or
property is misapplied by any of the partners while it is in the custody of the
firm, the partner or the firm, as the case may be, is liable to make good the loss.
[Section 27]
A, B and C are partners in a business of financing real estate. X, a client of the firm
repays his loans of Rs 50,000 to A who does not intimate his co-partners about the
recovery of the loan and misuses the money. In this case X would be discharged of
the debts on account of payment made to A. It is up to the firm whether it initiates
any suit against A to recover the amount held by him.