Introduction

The entire Partnership Framework in India is provided for by the Indian Partnership Act and it sets out the rights, duties and liabilities of partners. The Act goes on to describe the basics of what must be done by partners with an emphasis on loyalty, openness and sharing in a mutual activity that benefits all of them. They are also obligated as a group to act collectively in the best interests of the partnership, to make sure that errors resulting from fraud do not hurt the company financially while providing full financial accounts. Also, the Act recognizes partners’ freedom to define their obligations and rights so long as they are consistent with its provisions. Central to these partnerships are principles of equity and shared prosperity, as partners are expected to equally share in profits and losses while upholding the utmost good faith. Additionally, this law provides for how partnership property should be treated; it is only meant for business use. To comprehend these legal concepts is necessary when one wants to understand how partnership dynamics works within Indian legal system.

General duties of partners (Section 9 )

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 representative

The duties in general are :-

(1) To act to the greatest common advantage : This duty be read along with the provisions of section 16. If a partner makes a personal profit, he has to account for it to the firm, as making a personal profit would be acting not to the greatest common advantage.

(2) To be just and faithful to each other : Any fraudulent act or wilful default on the part of a partner would be inconsistenet with his duty stated above. Section 10 & 13(f) elaborate this duty. This duty demands uberrimae fidei (most abundant faith) amongst partners.

(3) To render true accounts : A partner has to keep accounts and vouchers properly. If he fails to do so, he has to account for the same.

Section 15 & 16 elaborate the duty in this regard.

(4) Render full information : This duty is part and parcel of the duty of being just and faithful to each other. The underlying principle is that a partner should make a full disclosure and should not conceal.

Duty to indemnify for loss caused by fraud (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.

This section is mandatory and not subject to a contract to the contrary.  The innocent partners of a firm are liable to third parties for the fraud of one of them, but under this section they are entitled to proceed against the partner who has committed the fraud. (Thomas v. Artherton)

Determination of rights and duties of partners by contract between the partners (Section 11)

(1) 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 consent of all the partners, and such consent may be expressed or may be implied by a course of dealing.

(2) Agreements in restraints of trade :-

Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner.

(S 27. Agreement in restraint of trade, void.—Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.)

“Subject to the provisions of this……” these words are intended to show that a partnership contract will be subject to the provisions of this Act. Where a provision is mandatory, the contract shall not prevail.

Thus court decreed dissolution of partnership prayed by the plaintiff on the ground of section 44(f) of the Act. (viz. At the suit of a partner, the court may dissolve a firm on the ground that the business of the firm cannot be carried on save at a loss.), despite the fact that the partnership agreement provided against dissolution and for the continuance of partnership until the construction of dock was fully completed.(Rehmat-un-Nissa Begam v. Price)

Similarly, according to Gujrat HC this statutory right to dissolution was not allowed to have been taken away by arbitration clause of partnership deed. (Manibhai S. Patel v. Swashray Construction Co.)

Liberty to the parties to determine their mutual rights and obligations :- This section incorporates the principal that, except in cases where this Act makes a mandatory provision, the parties are entitle to agree to any terms and provide for their mutual rights and obligations.

The provisions of sec 12 to 17, 20 & 42 are subject to the contract.

The provisions of section 9 & 10 are not subject to the contract.

The principles laid down in sections 11,18 & 19 are subject to the provisions of this Act.

Variation by consent :- Partners, if they please, may, in the course of the partnership, daily come to a new arrangement for the purpose of having some additions or alterations in terms of which they carry on business provided those additions or alterations be made with the unanimous concurrence of all the partners.

Reference : Rehmat-un-Nissa Begam v. Price

Agreement against dissolution by court :- It must be noted that the contract contemplated in section 11 of the Act cannot be contrary to the provisions of this Act as section 11 makes this clear by enacting “Subject to the provisions of this Act.” So it is not open to the parties to the contract to take away by contract the right of dissolution conferred on him by section 44 of the Act. (Hardutt Singh v. Mukha Singh)

Similarly, according to Gujrat HC this statutory right to dissolution was not allowed to have been taken away by arbitration clause of partnership deed. (Manibhai S. Patel v. Swashray Construction Co.)

The conduct of the business (Section 12)

Subject to contract between the partners,-

1. every partner has a right to take part in the conduct of the business;
2. every partner is bound to attend diligently (laganse) to his duties in the conduct of the business;
3. 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 the partners; and
4. every partner has a right to have access to, and to inspect and copy any of the books of the firm.

State Amendment (Maharashtra)
In section 12,-
(a) in clause (c), at the end, omit the word “and”;
(b) in clause (d), for the words “books of the firm”, substitute the words “books of the firm; and”;
(c) after clause (d), insert the following clause, namely-
“(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised  agents shall have a right of accesses to and to inspect and copy any of the books of the firm”.

Clause (a) : Right of partners to attend to business : Every partner has a right to take part in the conduct of the business. This right cannot be taken away except by a contract. It is quite common in practice to provide by express agreement about participation of any partners or salary to be given to any partner, etc.

Clause (b) : Duty to attend : Every partner is under an obligation to attend diligently to his duties in the conduct of the partnership business unless the deed provides that he need not attend.

Krishnamachariar v. Shankara Sah : A partner has to use his knowledge and skill in the conduct of the partnership business. Refusal and neglect on the part of any one partner to perform his duties gives to the other partner, on whom the whole conduct of the business is thrown, a right to compensation.

Clause (c) Power of majority : Erin Estate v. C.I.T. Madras :The SC observed that under clause (a), every partner has a right to take part in the conduct of the business. While a partner exercises his right under clause (a), it is only if any difference arises as to ordinary matters that the question of decision by a majority arises as otherwise, clause (c) would not come into play.

This power though not in itself of a judicial kind, is subject to the rule of natural justice. Every partner must have an opportunity of being heard, and the decision must be made in good faith with a view to the collective  interest of the firm. (Const. v. Harris)

Section 33 gives power of majority to expel partners.

House Ltd Agency v. Paints and Lacquers Ltd. : It would appear that where a suit is filed by one partner without the consent of the other partners, the majority of the partners may decide to discontinue the suit.

Rajnikant Hasmukhlal Golwala v. Natraj Theatre : A partner has a right to do business which cannot be fettered (rok) by any Court unless there is a contract to the contrary arrived at amongst themselves.

Clause (d) Right of access to books : A partner my inspect the books of the firm. This, however, does not give him any privilege to use those extracts for purposes hostile or injurious to the firm after he has ceased to be a partner. (Trego v. Hunt.)

Mutual rights and liabilities (Section 13)

Subject to contract between the partners-

1. a partner is not entitled to receive remuneration for taking part in the conduct of the business;
2. the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;
3. where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits;
4. a partner making, for the purposes 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 percent per annum;
5. the firm shall indemnify a partner in respect of payments made and liabilities incurred by him-
6. in the ordinary and proper conduct of the business, and
7. 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; and
8. a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.

Remuneration : Clause (a) makes an initial presumption that work done for the firm is gratuitous as every partner including a managing partner is bound to attend diligently the business of the firm and cannot charge his other partners with any sums like salary, commission etc. But this is a presumption which can be dispensed (allot/administer) with by agreement between the partners as to how the extra labour is to be remunerated. (V.D. Dhanawatey v. Commr. I.T., MP)

Share in profits and losses : M. Govindu & Co. v. Sevugan Chettiar :  According to SC, two presumptions are clubbed by section 13(1)(b) of the Act. First, if no specific contract is proved, the shares of partners must be presumed to be equal. So where there is unequal shares, the first presumption has no application. The second presumption is that where partners are to participate in profits in certain shares, they should also participate in losses in similar shares. Hence if profits are shared in unequal shares,  that applies equally to losses, according to SC.

Interest on capital and advances : Where a partner is entitled to interest on the capital, he will be paid interest only if there are profits. If, however, he advances moneys to the firm, he will be entitled to interest at 6 % from the firm whether there are profits or not (Somasundaram v. Sevugan Chettiar)

Partner’s right to indemnity and contribution : In addition to the ordinary claim of an agent to be indemnified, a partner may be entitled to reimbursement for what may be called emergency expenses incurred by him personally on behalf of the firm in circumstances of extraordinary requirement. (reference : section 21)

Wilful neglect and fraud : The word ‘wilful neglect’ would mean an act done deliberately and intentionally in contradiction to an act done inadvertence(oversight) or by a mistake or by accident. (Tamboli v. G.I.P. Rly.)

                  The firm is liable to third person for the wilful neglect or fraud of one of the partners, but under this section, the innocent partners are entitled to compensation from their partner for the loss caused to them by his wilful neglect (Thomas v. Atherton)

The property of the firm (Section 14)

Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

All joint property of partners is not partnership property. Only property answering the description in section 14 is partnership property.

“Principles of co-ownership cannot apply to partnership property eg., co-owner can without the consent of others, transfer his interest to a stranger. A partner cannot do this. One co-owner is not the agent of another but a partner is.” (Smt. Vraj Kuwar Bai v. Kunjbiharilal)

During partnership the partners cannot take away their property that they may have put into stock of partnership. The individual owner becomes a joint owner with other partners (Sudhansukanta v. Mahindra Nath)

“What is required is that, there must be evidence that, such property was brought into stock of firm and the evidence of mere user of property by the firm for its business does not make it a partnership property.

Goodwill : Goodwill of business is an asset like any other asset and representatives of deceased partner are entitled to share in it. If action be taken in time, the surviving partners can be restrained by injuction from appropriating goodwill. (Mohmd. A S Baig v. Hafija Bibi)

Valuation of goodwill : reference section 55

Trade Mark : It could form part of the firms property.

Application of the property of the firm (Section 15)

Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.

Use of partnership property : The rule laid down in this section is subject to the contract between the partners.The word ‘exclusively’ would indicate that such property is not to be used for a purpose other than that of partnership business.

So a mortgage of partnership property by a partner for his own benefit is invalid. (Smt. Vraj Kuwar Bai v. Kunjbiharilal)

If a partner uses the property of the firm for his own purposes, he will be liable to account to the firm for the profits, if any, that he may make.

“A contract of partnership is uberrimae fidei.” Most abundant faith

Mutual good faith

Personal profits earned by partners : Subject to contract between the partners (Section 16)

1. 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;
2. 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 rule laid down in this section flow from main and dominant principle viz. a partner is an agent of the other partner.

The said rule also flow from the duties stated in section 9.

Trimble v. Goldberg : The rule enunciated in clause (b) will not apply if the business carried on by a partner is not of the same nature or competing with that of the partnership business nor injurious in any way to the partnership business nor if it is totally independent business not within the scope of the partnership business.

Aas v. Benham : According to the decision given in this case, a partner may make personal profits from information obtained in the course of partnership business where he does so in another activity which is outside the scope of partnership business. Regarding the information used by the defendant for his benefit, the court observed that it was not the source of information but the use to which it is applied is important.

Rattanlal v. Jai Janinder Prasad : Knowledge and information derived by a partner from partnership was not regarded as partnership property.

Rights and duties of partners (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 as they were immediately before the change, as far as may be;

(b) After the expiry of the term of the firm, and :-  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.

Clause (a) : Change in the firm : This sub-section would cover the case of a new partner introduced into the firm. This sub-section was applied to a case in which A & B were partners with ten annas and six annas share respectively. On the death of A his son stepped into his shoes and without any express agreement, carried on the business with B. A’s son was held entitled to ten annas share. (Dawood Sahib v. Sheikh Mohideen).

Clause (b) : Extension of partnership : The continuance of business without liquidating the partnership affairs is presumed to be a continuance of the partnership. Where the partnership is continued after the expiry of the period fixed by the partnership agreement, such terms of the partnership agreement as are consistent with a ‘partnership at will’

remain applicable, but such terms as are inconsistent with a ‘partnership at will’ cease to be applicable.

Clause (c) : Additional undertaking : This sub-section contemplates a case in which the partners are the same, but there are further or other undertakings that those for which the partnership was originally formed. 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.