A partnership in India is a legal relationship between individuals who agree to share profits from a business carried on by all or any of them acting for all. The Indian Partnership Act, 1932, governs the formation, regulation, and dissolution of partnership firms in India. Understanding the intricacies of partnership contracts is essential for law students, as it encompasses various legal provisions, case laws, principles, and procedures.
MEANING, DEFINITION & EXPLANATION
Section 4 of the Indian Partnership Act, 1932, defines a 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.” This definition highlights three key elements:
- Agreement: There must be an agreement between two or more persons.
- Profit Sharing: The agreement should be to share profits from a business.
- Mutual Agency: The business must be carried on by all or any of them acting for all, indicating mutual agency.
The essence of a partnership lies in the mutual agency relationship, where each partner acts as both an agent and principal for the others.
HISTORICAL BACKGROUND / EVOLUTION
Before the enactment of the Indian Partnership Act, 1932, partnerships in India were governed by the Indian Contract Act, 1872. Sections 239 to 266 of the Indian Contract Act dealt with partnerships. However, with the growth of trade and commerce, the need for a specialized law became evident, leading to the introduction of the Indian Partnership Act, 1932, which provided a comprehensive framework for partnership firms.
ESSENTIALS / ELEMENTS / PRE-REQUISITES
For a valid partnership, the following essentials must be present:
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Number of Partners: A minimum of two persons is required to form a partnership. The maximum number of partners is restricted to 50, as per Section 464 of the Companies Act, 2013, read with Rule 10 of the Companies (Miscellaneous) Rules, 2014.
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Agreement: The partnership must be formed by an agreement, which can be oral or written. However, a written agreement, known as the partnership deed, is advisable for clarity and to avoid disputes.
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Lawful Business: The partnership must be formed to carry on a lawful business. An association formed for illegal purposes is not recognized as a partnership.
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Profit Sharing: There must be an agreement to share profits among the partners. Sharing of losses is not mandatory but is usually implied.
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Mutual Agency: Each partner must have the authority to act on behalf of the firm and other partners, indicating a mutual agency relationship.
LEGAL PROVISIONS / PROCEDURE / SPECIFICATIONS / CRITERIA
The Indian Partnership Act, 1932, lays down various provisions regarding the rights, duties, and liabilities of partners:
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General Duties of Partners (Section 9): Partners are bound to carry on the business of the firm to the greatest common advantage, be just and faithful to each other, and render true accounts and full information of all things affecting the firm to any partner.
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Determination of Rights and Duties by Contract (Section 11): The mutual rights and duties of partners can be determined by a contract between them, which can be express or implied.
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Conduct of Business (Section 12): Subject to any agreement, every partner has the right to take part in the conduct of the business, and differences arising as to ordinary matters connected with the business may be decided by a majority of the partners.
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Mutual Rights and Liabilities (Section 13): Partners are entitled to share equally in the profits earned and contribute equally to the losses sustained by the firm, subject to any agreement to the contrary.
CASE LAWS / PRECEDENTS
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Cox v. Hickman (1860) 8 HLC 268: This case established that sharing of profits is not the sole test of partnership; the true test is the existence of a mutual agency relationship.
- Facts: Two traders, Smith and Son, assigned their property to trustees (including Cox and Hickman) to manage the business and pay off debts. The trustees carried on the business, and creditors sought to hold them liable as partners.
- Issue: Whether the trustees were partners in the business.
- Held: The House of Lords held that the trustees were not partners, as there was no mutual agency between them and the original owners.
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Mollow, March & Co. v. The Court of Wards (1872) LR 4 PC 419: This case emphasized that the sharing of profits is prima facie evidence of partnership, but not conclusive.
- Facts: A zemindar (landowner) entered into an agreement with a merchant to manage his estate and share profits. Disputes arose regarding the nature of their relationship.
- Issue: Whether the agreement constituted a partnership.
- Held: The Privy Council held that the agreement did not constitute a partnership, as there was no mutual agency, and the merchant was merely an agent.
DOCTRINES / THEORIES
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Doctrine of Holding Out (Section 28): If a person represents himself or knowingly allows himself to be represented as a partner in a firm, he is liable as a partner to anyone who gives credit to the firm based on such representation.
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Doctrine of Mutual Agency: The cornerstone of partnership law, this doctrine implies that each partner is both an agent and principal for the firm and other partners.
MAXIMS / PRINCIPLES
- “Delegatus non potest delegare”: A delegate cannot further delegate. In the context of partnerships, a partner cannot delegate his duties to another person without the consent of other partners.
