One partner signed a contract: is the firm and every partner bound?

You and two friends start a firm. One of you meets a supplier and signs a large order. The other two hear about it a week later. Now the supplier wants payment, and you are asking: is the firm bound? Are we all liable? Or only the partner who signed?

This article answers that from the Indian Partnership Act, 1932, for founders choosing or running a partnership firm.

The short answer

In a partnership firm, each partner is the firm's agent. If one partner signs a contract in the usual course of the firm's business, the firm is bound. Every partner is then liable for what the firm owes, jointly and also separately. There are limits on what one partner can sign, and you can restrict a partner's power, but that restriction may not protect you against an outsider who did not know of it.

First, who is a partner and what is a firm?

The Act 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" (s.4, Indian Partnership Act 1932). People who enter into it are called partners. Together they are called a firm. The name they trade under is the "firm name".

Notice the words "acting for all". The law starts from the idea that one partner can act for the others.

Every partner is the firm's agent

Section 18 is one line: "Subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm" (s.18, Indian Partnership Act 1932).

An agent is someone who acts for another. So when a partner signs for the firm, the law treats it as the firm acting. For acts within the partner's implied authority, you do not need the other partners' signatures.

What a partner can bind the firm to: "implied authority"

Section 19(1) says: "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." The Act calls this the partner's "implied authority" (s.19(1), Indian Partnership Act 1932).

Read it in two parts.

• The act must be to carry on business of the kind the firm does. A catering firm buying vegetables is within it. Signing up to build a warehouse is not obviously so.
• The act must be done in the usual way. A normal purchase order, a normal service contract, a normal hiring: these are usual. An unusual, one-off, very large commitment is a harder case.

The section is also "subject to the provisions of section 22". We cover that below.

What a partner cannot do on implied authority alone

Section 19(2) lists things the implied authority does not cover. This list applies "in the absence of any usage or custom of trade to the contrary." Without such a custom, a partner's implied authority does not empower him to:

• submit a dispute relating to the business of the firm to arbitration;
• open a banking account on behalf of the firm in his own name;
• compromise or relinquish any claim or portion of a claim by the firm;
• withdraw a suit or proceeding filed on behalf of the firm;
• admit any liability in a suit or proceeding against the firm;
• acquire immovable property on behalf of the firm;
• transfer immovable property belonging to the firm; or
• enter into partnership on behalf of the firm.

(s.19(2), Indian Partnership Act 1932.)

For a founder, items 6 and 7 are the ones to remember. If one partner signs an agreement to buy a shop or sell the firm's land, the Act does not give him that power just because he is a partner. Get every partner's written agreement first. Item 8 matters too: one partner cannot pull the firm into a new partnership on his own.

This list says implied authority does not cover these acts. It does not say every such act is void, so take advice before you rely on it to walk away from a signed document.

Can the partners limit one partner's power?

Yes, between themselves. Section 20 says: "The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner" (s.20, Indian Partnership Act 1932).

So your partnership deed can say, for example, that no partner may sign a contract above a set amount without the others' consent. Or it can say that one partner alone handles purchasing.

But read the second half of section 20 carefully. It says: "Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner" (s.20, Indian Partnership Act 1932).

Put plainly:

• If the supplier knew about the limit in your deed, the firm is not bound by a contract that breaks it.
• If the supplier did not know, the firm is still bound, as long as the contract was within the partner's implied authority.
• If the supplier did not know or believe the signer to be a partner at all, the same exception applies.

So an internal restriction is a promise among partners. It is not a shield against outsiders who knew nothing of it.

If you want a restriction to have effect against a counterparty, make sure the counterparty knows.

How the contract must be signed: section 22

Authority is one test. The way the document is signed is another. Section 22 says: "In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm" (s.22, Indian Partnership Act 1932).

This is a practical point. If a partner signs only in his own name and nothing shows he is signing for the firm, section 22 may not be met. If he signs as "for ABC Associates" or "ABC Associates, by its partner Ravi Kumar", it is. Make this your habit. Always put the firm name on the contract and sign with a note that you sign for the firm.

Are the other partners personally liable?

Section 25 is direct: "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, Indian Partnership Act 1932).

"Jointly" means the partners share the liability together. "Severally" means each one can be pursued on his own. Each partner can be proceeded against on his own for the firm's acts. The section speaks of liability "for all acts of the firm" and states no limit by reference to the capital a partner put in. Take advice before assuming any ceiling applies to you.

So a partner who did not sign, and did not know of the contract, is still liable if it binds the firm. Liability covers acts "done while he is a partner".

Wrongs by a partner

Contracts are one risk. Wrongs are another. If a partner, "acting in the ordinary course of the business of a firm, or with the authority of his partners", causes loss or injury to a third party, or a penalty is incurred, the firm is liable "to the same extent as the partner" (s.26, Indian Partnership Act 1932).

Money handed to the firm is covered as well. If a partner acting within his apparent authority receives money or property from a third party and misapplies it, the firm must make good the loss (s.27, Indian Partnership Act 1932).

Anyone who holds himself out as a partner

Section 28 catches a person who is not a partner but acts like one. Anyone who represents himself, or knowingly permits himself to be represented, as a partner "is liable as a partner in that firm to any one who has on the faith of any such representation given credit to the firm" (s.28(1), Indian Partnership Act 1932). If you let a friend be introduced as a partner to win a supplier's trust, he may carry a partner's liability to that supplier.

Step by step: before and after a partner signs

• Write a partnership deed. Say who may sign what, and up to what amount (s.20, Indian Partnership Act 1932).
• Require every partner's written consent for the items in s.19(2): immovable property, arbitration, compromising claims, admitting liability.
• Tell key counterparties about the limits, in writing. Under s.20 they only count against someone who knew of them.
• Check each signing block shows the firm name and that the signer signs for the firm (s.22).
• Share every signed contract with all partners the same day.
• If a contract surprises you, check whether it is business of the kind the firm carries on, in the usual way (s.19(1)), and whether your deed limited it and the other side knew (s.20). Get a CA or lawyer to look before you reply or pay.

What not to do

• Do not assume a limit in your deed protects the firm against a supplier who never saw it.
• Do not let a partner sign in his own name only, if you want the firm to be the party.
• Do not allow a partner to sign land deals or arbitration agreements on implied authority alone.
• Do not let anyone be introduced as a "partner" if he is not one (s.28, Indian Partnership Act 1932).

If you want the other partners' liability to be limited

If you want the business to carry the obligation instead of each person, compare the Limited Liability Partnership Act, 2008. There, every partner is the agent of the LLP "but not of other partners" (s.26, Limited Liability Partnership Act 2008). An obligation of the LLP, "whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership" (s.27(3), Limited Liability Partnership Act 2008). And a partner "is not personally liable, directly or indirectly" for it "solely by reason of being a partner" (s.28(1), Limited Liability Partnership Act 2008).

The LLP's protection has limits. The Act keeps a partner's personal liability for his own wrongful act or omission, though he is not personally liable for that of another partner (s.28(2), Limited Liability Partnership Act 2008). The LLP is also not bound where the partner in fact has no authority and the other side knows that, or does not know or believe him to be a partner (s.27(1), Limited Liability Partnership Act 2008).

That is a structure choice. Think about it at the start.

What to do now

• Next step: Take out your partnership deed. Find out whether it limits any partner's signing power and whether the counterparty knew of the limit. Then collect every contract signed in the firm's name in the last year and check each against s.19(1) and s.22. (ss.19, 20 and 22, Indian Partnership Act 1932)
• Deadline: The Act sets no deadline for this check. Do it before you pay, reply to or perform a contract you did not approve, and before the next signing.
• Consequence of leaving it: The firm may be bound by what one partner signed, and every partner is liable jointly and severally for the firm's acts done while he is a partner. (ss.19(1), 20 and 25, Indian Partnership Act 1932)

Have a CA review your facts before you act or file.

FAQs

Our deed says no partner can sign above a set amount, but one did. Is the firm bound?
It depends on whether the other side knew of the restriction. Section 20 says the firm is bound by an act within the partner's implied authority, "unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner" (s.20, Indian Partnership Act 1932). Between partners, the deed still counts.

Can I be sued personally for a contract I never saw?
Yes, if it binds the firm. Section 25 says 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, Indian Partnership Act 1932).

Can one partner sell the firm's building on his own?
Implied authority does not empower a partner to transfer immovable property belonging to the firm, absent a contrary usage or custom of trade (s.19(2)(g), Indian Partnership Act 1932). Get all partners' written approval.

Does an LLP avoid all of this?
Not all. In an LLP, an obligation of the LLP is solely the LLP's, and a partner is not personally liable for it solely by being a partner (ss.27(3) and 28(1), Limited Liability Partnership Act 2008). But a partner stays personally liable for his own wrongful act or omission (s.28(2), Limited Liability Partnership Act 2008).

---

See Also

• A partner is retiring: who stays liable, and what public notice you must give
• Converting our LLP into a private limited company
• Startup India (DPIIT) recognition rejected — what to fix and reapply