A partnership is nothing but a notional extension of Agency: Comprehensive Study

Written by: Ishit Todwal

INTRODUCTION

A partnership can be found in a wide variety of forms across the world. However, because it is tied to equal shares in profit and loss, it is primarily studied in the business sector. As a result, the focus of this research is to understand the concept of partnership as a notional extension of the agency.

Business is a commercial activity in which one or more people participate in a certain

occupation. The term "partnership" refers to the association of two or more people in a

business.

Hence, a partnership is one of the ways that enterprises can be run with a group of two or more people who can contribute capital and expertise to the venture.

The concept of a hypothetical extension of the agency is dealt with by Indian courts,

particularly in the context of corporate partnerships. This is to ensure that beneficial law for

such partnerships are applicable.

There are several laws governing business in India, but there is a separate statute for

'Partnership.'The Partnership Act of 1932 was adopted by Parliament to prohibit firms from

forming partnerships.

Research Objective

· To understand the concept of Partnership as an extension of agency under Indian Partnership Act, 1932.

· To understand the concept of partnership and agency.

Research Question

· How can a partnership be a Notional extension of the agency under the concept of the Indian partnership Act 1932?

· Who can be an agent and principal in partnership under Indian Partnership Act 1932?

PARTNERSHIP

The Ministry of Corporate Affairs administers the Indian Partnership Act of 1932, which arose from the English Partnership Act of 1890. This Act was signed into law on April 8, 1932, and went into effect on October 1, 1932. The Indian Contract Act dealt with the subject of partnership in Chapter IX under Sections 239 to 266 prior to this Act. The term partnership is defined in “Section 4 of the Indian Partnership Act” which states that “Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.”[1]

There are certain elements of partnership which are required to carry on a partnership.

Essential requirements of a partnership[2]

1. There must exist an agreement between the partners.

2. The agreement should be to carry a business.

3. The motive is to earn profit and share between the partners.

4. The agreement must be to carry out the business jointly or by any of them acting on the behalf of all.

Agency

The relationship between parties is called an agency when one party delegated certain authority to another and the later acts on behalf of the first party in a more or less independent manner. It is possible to have express or implicit agency.

Who is an agent and principal?

Indian Contract Act 1872 defines Agent and Principal in Section 182 which states that “An ‘agent’ is a person employed to do any act for another or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the ‘principal’.”[3]

Ramswami J. clarified the concept of agency in the case "Krishna v. Ganapathi," saying that not everyone who acts for another is an agent. He used the example of a domestic servant who provides a personal service to his master, but he cannot be called an agent. The differentiating feature of an agent can be summarised as representative character and derivative authority.

Analysis

Partnership as Notional Extension of Agency

A partnership is a commercial arrangement in which two or more individuals agree to share earnings. The business may be operated by all of them or by one of them working on their behalf. According to this concept, a partner might function as the other's agent.

According to Section 18 of the Indian partnership Act “Partner to be agent of the firm. —Subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm.”[4]

For the purposes of doing business, each partner acts as the firm's agent. He works as a principal for himself and as an agent for other partners, even if the other partner is simply a sleeping partner.

Since each partner is a principal and agent of the firm, partnership is a theoretical extension of agency. A partner as an agent will do his job to the best of his ability and achieve maximum efficiency because his task will directly benefit him in earning profits for the firm and himself, whereas in an agency, the principal will benefit more than the agent for the task that the agent performs, and thus the agent will not perform to his full potential.

Relevant Case Laws

Cox v. Hickman[5]

Facts: Benjamin Smith and Josiah T Smith operated the Smith & Son iron and maize trading company. They owed a significant quantity of money to the company's creditors. Cox and Wheatcroft were one of the creditors that attended the creditors' conference with S & S. They executed a deed of arrangement in favor of the creditors.

The deed was signed by three parties: S & S signed the first section, while five creditors, including Cox and Wheatcroft, signed the second section. The third portion of the deed was signed by S & S's general body creditors. The party to the second part was required to do business as The Stanton Iron Company as a trustee. Additionally, this agreement had a provision guaranteeing that they would never sue Smiths for any of their obligations. Wheatcroft resigned six weeks after the deed was recorded, and Cox never served as a trustee. No further trustees were appointed in the absence of Cox and Wheatcroft.

Following Wheatcroft's resignation, merchant Hickman produced three bills of exchange for the goods he had received. These invoices were received by one of the three creditors on behalf of the Stanton Iron Company. Hickman sued Cox and Wheatcroft, saying that as the initial parties, they were also liable for the second portion of the deed.

Held: As a consequence of the deed's execution, the creditors were not declared partners in the Stanton Iron Company. The deed is just a commitment to repay creditors with present and future earnings. Creditors were granted special powers under the terms of the instrument. Creating trade restrictions and determining whether to continue the business. Rather than doing business directly, the creditors entrusted it to the trustees. As a consequence of their activities, the creditors did not become partners. The trustees would not have accepted the bills of exchange if the creditors had opted to conduct the deal. The agreement did not create a partnership between creditors and trustees.

As a consequence, creditors are not held liable since they are not principals of the trustees. On the other hand, trustees are liable since they operate as the contract's agent.

As a consequence, the defendants are acquitted of liability.

Ross v. Parkyns[6]

Facts: The plaintiff and the defendant that is Parkyns agreed that the accounts should be carried in the defendant's name. He or the plaintiff as his agent must also sign the subscription policies. The plaintiff was meant to keep track of the firm's finances in exchange for a fixed pay and a fifth of the profits. The defendant was responsible for the loss. Furthermore, if an unexpected claim is made in any year following the division of profits, the plaintiff was required to pay his portion of the same, which could not exceed the money he received as his share of profit under any circumstances.

Held: It was held in this case that as there was a lack of mutual agency, there was no partnership.

CONCLUSION

Agent agreements are quite prevalent in business law, and contracts creating an agency connection are very common in business law. These may be stated explicitly or impliedly. An agency is formed when a person delegated his or her power to another person, that is, appointed them to do a certain task or a number of jobs in a defined field of work, and the other person accepted the delegation. The establishment of a Principal-Agent relationship results in the assignment of rights and responsibilities to both parties.

The presence of a Mutual Agency, a key element of partnership law, is very advantageous in achieving a successful conclusion. Each partner who is active in the firm's operations acts as both principal and agent for the other partners. As a consequence, an act undertaken by one partner on behalf of the company binds all of the partners. A mutual agency connection between the individuals who comprise a group formed with the purpose of making profits via the running of a business may be determined to exist, and a partnership may be found to exist.

A partner acting as an agent will perform to the best possible level and improve productivity because his task directly impacts him by producing profits for the company and oneself, whereas in an agency, the principal benefits more than the agent from the agent's task, so the agent will not perform to his maximum capabilities.

[1] Indian Partnership Act, 1932, s. 4. [2] Dr. S.S. Srivastava, Law of Contract I & II 622 (CENTRAL LAW PUBLICATIONS, 6th edn., 2022). [3] Indian Partnership Act, 1932, s. 182. [4] Indian Partnership Act, 1932, s. 18. [5] Cox v. hickman, (1860) 8 HLC 268. [6] Ross v. Parkyns, (1875) L.R. 20 Eq.331,335