Indian Partnership Act (1)

Rights and Duties of Partners

Contents

1. Determination of the rights and duties of the partners

2. Mutual rights and duties of partners

a. Duties of Partners

i. General Duties of Partners

ii. Duty to indemnify for loss caused by fraud

iii. Duty relating to the conduct of business

iv. Duty to indemnify the firm for any loss caused to it

by his willful neglect

v. Duty in respect of personal profits earned by partners

vi. Duty no to compete with the business of the firm

vii. Duty in respect of Application of the Property of the

viii. Duty to contribute equally to the losses

b. Rights of Partners

i. Right to take part in the conduct of the business

ii. Right to have access to and to inspect and copy

books of the firm

The Indian Partnership Act ,1932 Page 1

iii. Right to share equally in the profits earned

iv. Right to receive interest on the capital subscribed

v. Right to indemnity in respect of payments made and

liabilities incurred

vi. Right to receive remuneration

vii. Majority rights

c. Rights and duties of partners after a change in the firm,

after the expiry of the term of the firm and where

additional undertakings are carried out

d. References

Determination of the Rights and Duties of Partners

Definition of ‘partnership’ as contained in Section 4 of the Partnership Act,

1932 and Section 5 of the same Act make it clear that partnership is created by

contract. Therefore the fundamental principle relating to relations of partners

with each other is that everything depends upon the consent of the partners. In

England v. Curling, Lord Langdale, M.R. observed:

“With respect to a partnership agreement, it is to be observed, that all

parties being competent to act, as they please, they may put an end to or

vary it at any moment; a partnership agreement is therefore open to

variation from day to day, and the terms of such variations may not only

be evidenced by writing but also by the conduct of the parties in relation

to the agreement, and to their mode of conducting their business when

therefore there is a variation and alteration of the terms of a partnership, it

does not follow that there was not a binding agreement at first. Partners,

if they please, may in the course of the partnership, daily come to new

arrangement for the purpose of having some addition or alteration in the

terms on which they carry on business, provided those additions or

alterations be made with the unanimous concurrence of all the partners.”

This rule has been incorporated Section 11 (1) of the Indian Partnership

Act, 1932, in the following words:

“Subject to the provisions of this Act, the mutual rights and duties of

the parties 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 consent of all the parties, and such

consent may be expressed or may be implied by a course of dealing.”

Section 11 (2) is relating to agreement in restraint of trade. The

fundamental rule relating to agreements in restraint of trade has been

propounded in section 27 of the Indian Contract Act, 1872, which provides the

following:

“Every agreement by which anyone is restrained from exercising a lawful

profession, trade or business of any kind, is to that extent void.”

Section 27 contains an exception in respect of sale of goodwill. Section

11 (2) of the Partnership Act is another exception to Section 27. Section

11 (2) provides:

“Notwithstanding anything contained in Section 27 of the Indian Contract

Act, 1872, such contract may provide that a partner shall not carry on

any business other than that of the firm while he is a partner.”

Illustration

X, Y and Z are partners. The partnership deed provides that if any partner

ceases to be a partner he will not carry on any business similar to that of the

firm throughout India. Z retires from the firm and takes steps to set a similar

business in Calcutta. Can Z be restrained by the court at the suit of X and Y?

This case is not covered under Section 11 (2) of the Partnership Act. Section 11

(2) applies while a person is a partner. Section 54 is also relating to agreement

in restraint of trade. It provides: “Partners may, upon or in anticipation of the

dissolution of the firm, make an agreement that some or all of them will not

carry on a business similar to that of the firm within a specified period or within

specified local limits and not withstanding anything contained in Section 27 of

the Indian Contract Act, 1872, such agreement shall be valid if the restrictions

imposed are reasonable.” For a case to be covered under Section 54, following

conditions must be satisfied: (a) restriction for carrying on similar business must

be within a specified period or within specified local limits, and (b) restrictions

imposed are reasonable. The above case is not covered even under Section 54

because restriction that the retiring partner will not carry on any business similar

to that of the firm throughout India, cannot be said to be within a specified

period or within specified local limits. Moreover such a restriction is not

reasonable. Thus such a restriction shall be void under Section 27 of the Indian

Contract Act; Z cannot therefore, be restrained by the court at the suit of X

and Y.

Mutual rights and Duties of Partners

Duties of partners

1) General Duties of Partners:- According to Section 9 of the

Partnership Act, 1932, Partners are bound to carry on the business of the

firm to the greatest common advantage, to be just and faithful to each

other, and to render true accounts and full information of all things

affecting the firm to any partner or his legal representatives. Thus

partners are bound to be just and faithful to each other. They are also

bound to carry on the business of the firm to the greatest common

advantage. Therefore, during the course of business no partner can do any

act which may be against his duty to work to the greatest common

advantage and to be just and faithful. For example if a partner is

authorized to buy goods for the partnership firm and he supplies the

goods from his own stock and earns profits, he will be bound to give the

said profits to the firm. Similarly if the partner himself buys the goods of

the firm and earns profits and sells to a company in which he has vested

interests, he will be liable for violation of Section 9 and will have to give

the profits to the firm. This matter has been further clarified in Section 16

which provides the following:

“Subject to contract between the parties-

a) If a partner derives any profit for himself from any transaction of

the firm, or from the use of property or business connection of the

firm name, he shall account for that profit and pay it to the firm ;

b) If a partner carries on any business of the same nature as and

competing with that of the firm he shall account for and pay to the

firm all profits made by him in that business.”

The Bombay High Court has held that if a partner fraudulently takes the

contract in his own name or enters into the contract in his own name, then he

will be liable to compensate the firm. Similarly, if some partners of the firm

earn profits through the use of firm’s property or firm’s relations, they will be

liable to account for such profits to the firm.

But as pointed out in Section 16 of the Partnership Act, this rule is subject

to contract between the partners. In other words, if the partners so please, they

may modify this rule in connection with the business of the firm. For example,

the contract may provide that a particular partner may use firm’s property and

relations for the benefit of his own business.

2) Duty to indemnify for loss caused by fraud:- According to

Section 10- “Every partner shall indemnify the firm for any loss caused to

it by his fraud in the conduct of the business of the firm.” For example, a

partnership between A and B entered into a contract with the Government

and subsequently due to act and conduct of B the Government

cancelled the contract and gave it to B. the Bombay High Court held that

the contract obtained by B in his own name shall be benefit for the benefit

of the partnership. The Court also held that if the contract given to B is of

less value than that of the earlier contract with the partnership, B will be

liable for the loss because the situation has been brought about by his

fraudulent conduct.

3) Duty relating to the Conduct of the business:- As provided

under Section 12 (b), “subject to contract between the partners, every

partner is bound to attend diligently to his duties in the conduct of the

business.” According to Section 12 (c), subject to contract between the

partners, any difference arising as to ordinary business may be decided

by a majority of the partners and every partner shall have the right to

express his opinion before the matter is decided, but no change may be

made in the nature of the business without the consent of all the partners.

Thus Section 12 (c) makes it clear that in ordinary matters decision

shall be taken by the majority of the partners but before taking the

decision it is necessary to give every partner opportunity to express his

views. Moreover the majority should decide the matter in good faith. In

respect of the conduct of important matters, consent of all the partners is

necessary. In Const v. Harris Lord Eldon clarified the position of law

in the following words:

“I call that the act of all, which is the act of the majority, provided

all are consulted, and the majority are acting bona fide, meeting not for

the purpose of negating what anyone may have to offer, but for the

purpose of negating, what when, they are met together, they may, after

due consideration think proper to negative, for majority of partners to say,

we don’t care what one may say, we being the majority we will do what

we please, is I apprehend, what this court will not allow.”

In Suresh Kumar v. Amrit Kumar, the Delhi High Court approved

the above observation of Lord Eldon. In this case, the plaintiff and the

defendants (1 to 6) were carrying on the business of motor cars, jeeps and

their spare parts under the name of Sanghi Motors. The plaintiff was the

Managing partner of the business and his appointment had been made

with the consent of all the partners and that he was acting in this capacity

from the very beginning majority of partners removed him and appointed

Ashok Kumar Sanghi as the Managing partner. The Delhi High Court

held that above majority decision cannot be enforced. The Delhi High

Court observed that a mere reading of Section 12 (c) makes it clear only

that majority decision can apply only in respect of ordinary matters of the

conduct of business. A majority of partners is not entitled to decision on

important matters to make them binding on other partners. Decision

on important matters can be taken with the consent of all the partners.

Moreover, it is necessary that majority decision should have been taken in

good faith. Undoubtedly the power of management of the partners is co-

extensive. But it is also agreed that the control and management of the

partnership business is done by one partner and it is not essential that it

must be done by all the partners. The same thing happened in this case.

The plaintiff had been acting as managing partner with the consent of all

the partners since the very inception. This consent cannot be withdrawn

by the majority of partners in the context of controversy or dispute. The

Court further held that undoubtedly the resolution of the majority to

remove the plaintiff from the post of managing partner had been passed

not with the desire to share more responsibilities or to increase the

interests of partners but with ill-will and malice. Further, before passing

the resolution, the plaintiff and the defendants 5 and 6 had not been given

opportunity to express their view nor was it recorded in the book of the

firm. Consequently this resolution is liable to be ignored.

4). Duty to indemnify the firm for any loss caused to it by his

willful neglect:-According to Section 13 (f) : Subject to a contract

between partners, a partner shall indemnify the firm for any loss caused

to it by his willful neglect in the conduct of the business of the firm.

It is a well-recognized principle of partnership that if any partner

during the course of the conduct of the business, commits breach of his

duty or fraud or is guilty of culpable negligence and the property or

interests of the firm are thereby adversely affected or damaged, whether

or not in law he may be held liable, in equity he can be held liable to

indemnify the firm. Clarifying the position of law in Bury v. Allen,

Knight Bruce, V.C. observed :

“Suppose, the case of an act of fraud, or culpable negligence, or

willful default by a partner during the partnership, to the damage of

its property or interest, in breach of his duty to the partnership;

whether in law compellable or not compellable, he is certainly in

equity compellable to compensate or indemnify the partnership in

this respect.”

This position of law prevails even today. A bare reading of Section

13 (f) makes it clear that a partner shall not be liable for ordinary

negligence. He will be liable to indemnify when he is guilty of willful

negligence. Willful negligence here means an act done by a partner

willfully knowing that it will cause damage. But if in the ordinary

conduct of his business he commits an error in taking a decision and loss

is caused to its firm thereby, he shall not be liable to indemnify the firm.

5). Duty in respect of personal profits earned by

partners:-According to Section 16 (a) of the Partnership Act, if a

partner derives any profit for himself from any transaction of the firm, or

from the use of the property or business connection of the firm or the firm

name, he shall account for that profit and pay it to the firm. But this is

subject to contract between the partners. As observed by Lindley, L.J.,

“It is clear law that every partner must account to the firm for every

benefit derived by him without the consent of his co-partners from any

transaction concerning the partnership or from any use by him of the

partnership property, name or business connection.”

Thus in the absence of a contract to the contrary, if a partner earns profits

by making use of firm’s name or property he must account for and pay to the

firm such profits. In one case, a partner without consent and notice of other

partners, himself purchased the property of the firm. It was held that other

partners are entitled either to prevent such sale or to challenge the sale price and

compel the partner to purchase it on proper and fair price.

6). Duty not to compel with the business of the firm:-Section

16 (b) of the Partnership Act provides, Subject to contract between the

partners, if a partner carries on any business of the same nature as and

competing with that of the firm he shall account for and pay to the firm

all profits made by him in that business. Under a contract partners may

allow a partner to carry on a business competing with the business of

the firm. It is also possible that the partner may be prohibited to carry on

a business competing with the business of the firm by mentioning a

provision to this effect in the partnership deed itself. A partner violating

such a contract will have to account for and pay to the firm. But if a

partner does some private act outside the scope of the business of the

partnership firm and earns profits he shall not be liable to account for and

pay to the firm such profits.

7). Duty in respect of application of the property of the

firm:-According to Section 15, Subject to contract between partners, the

property of the firm shall be held and used by the partners exclusively for

the purposes of the business. If a partner uses firm’s property for private

benefits, he shall account for and pay such profits to the firm.

8). Duty to contribute equally to the losses:-Section 13 (b)

provides that the partners shall contribute equally to the losses sustained

by the firm.

Rights of Partners

1) Right to take part in the conduct of the business:-Every

partner has a right to take part in the conduct of the business. But this

right is subject to contract between the partners. Unless there is a

contract to the contrary between the partners the court cannot, through an

injunction, prevent or restrain a partner from taking part in the conduct of

the business. So will be the case where there is controversy or difference

of opinion among the partners. A partner can be deprived of his right to

take part in the conduct of business only through a contract between

partners.

2) Right to have access to and to inspect and copy books of the

firm:-Subject to contract between the partners, every partner has a right

to have access to and to inspect and copy, any of the books of the firm.

3) Right to share equally in the profits earned:-The partners are

entitled to share equally in the profits earned. This is subject to contract

between the partners.

4) Right to receive interest on the capital subscribed:-Subject to

contract between the partners, where a partner is entitled to interest on

the capital subscribed by him, such interest shall be payable only out of

profits. Further, a partner making for the purpose of the business, any

payment or advance beyond the amount of capital he has agreed to

subscribe, is entitled to interest thereon at the rate of six per cent per

annum. This again is subject to contract between the partners.

5) Right to indemnity in respect of payments made and

liabilities incurred:- According to Section 13 (e), Subject to contract

between the partners, the firm shall indemnify a partner in respect of

payments made and liabilities incurred by him :

a. In the ordinary and proper conduct of the business, and

b. In doing such act, in an emergency, for the purposes of protecting

the firm from loss as would be done by a person of ordinary

prudence, in his own case under similar circumstance.

Section 13 (e) confers on a partner the right to receive indemnity in two

situations-(i) in the ordinary and proper conduct of the business and (ii) in

emergency. As regards the first situation, a partner gets the right to be

indemnified by the firm only when he makes payment and incurs

liabilities in the ordinary and proper conduct of the business. If the

partner does an act outside the scope of his authority and is guilty of

willful neglect and carelessness, he will not be entitled to be indemnified.

The second type of situation which entitles a partner to be indemnified is

during emergency. His right to be indemnified is subject to the condition

that he acts 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. Thus the test is if a person of ordinary prudence would

have acted in a similar way in his own case under similar circumstance?

If the answer is in affirmative, the partner will be entitled to be

indemnified by the firm.

6) Right to receive remuneration:-The general rule is that a partner

is not entitled to receive remuneration for taking part in the conduct of

the business. But this rule is subject to contract between the partners.

Thus the contract between the partners provides for the payment of

remuneration, to any partner, then such a partner will be entitled to

receive it.

7) Majority rights:-According to Section 12 (c), Subject to contract

between the partners- any difference arising as to ordinary matters

connected with the business may be decided by a majority of the partners

and every partner shall have the right to express his opinion before the

matter is decided, but no change may be made in the nature of the

business without the consent of all partners.

Rights and Duties of Partners after a change in the firm, after

the expiry of the firm and where additional undertakings are

carried out:-The provisions in this connection are contained in Section

17 of the Indian Partnership Act, 1932. According to Section 17, Subject

to contract between the partners—

a) After a change in the firm:-Where a change occurs in the

constitution of a firm, the mutual rights and duties of the partners

in the reconstituted firm remain the same way as they were

immediately before the change, as far as may be; and

b) After the expiry of the term of the firm:- Where a firm

constituted for a fixed term continues to carry on business after the

expiry of that term, the mutual rights and duties of the partners

remain the same as they were before the expiry, so far as they may

be consistent with the incidents of partnership at will; and

c) Where additional undertakings are carried out:-Where a

firm constituted to carry out one or more adventures or

undertakings, the mutual rights and duties of the partners in

respect of the other adventures or undertakings are the same as

those in respect of the original adventures or undertakings.

According to Section 17 (a), where a change occurs in the constitution of

the firm, the mutual rights and duties of the partners of the reconstituted firm do

not change. For example, A and B were partners in a firm and their share in the

profits of the firm was 10 annas and 6 annas respectively. After the death of A

his son became the partner and without any express agreement the business

continued. It was held that A’s son is entitled to receive share of 10 annas.

Similarly, Section 17 (b) provides that after the expiry of the term of the firm,

mutual rights and duties of the partners remain the same. But after the

expiry of the term, partnership becomes a partnership at will. It is, therefore,

necessary that the said rights and duties of partners must be consistent with the

incidents of partnership at will.

According to Section 17 (c), where additional undertakings are carried

out, the mutual rights and duties of the partners in respect of these undertakings

or adventures shall remain the same as those in respect of the original

adventures or undertakings. The same rule applies where the business is

continued after the death of a partner. The main reason behind this rule is that in

the absence of an express agreement, either the original contract is deemed to

have continued or its novation having taken place. This view has been

expressed by Lord Watson in Neilson v. Mossend Iron Co., Lord Watson

further said that this rule also applies to other contracts. The legal effect of this

is that all the terms and conditions of the original contract continue to the extent

they are not inconsistent with the implied terms of the new contract.

References

1) Contract II alongwith Partnership Act & Sale of Goods Act – Dr.

S.K. Kapoor

2) Contract II – R.K. Bangia

3) Indian Contract Act II – Avatar Singh

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