Partnership 331It is possible for one or more partners to limit their liability under the Limited Partnerships
Act 1907. This act is considered at the end of this chapter. It is of little practical importance
because a partner who has limited his liability is not allowed to manage the firm. It should
of course be remembered that a limited liability partnership (LLP) is quite different. LLPs
are considered later in this chapter on p. 346.
Agency
Partners are the agents of their fellow partners and of the firm. This means that contracts
made by individual partners can become binding on all of the partners. Furthermore, if an
individual partner commits a tort, other partners can become liable for this. To understand
the way in which one partner can make fellow partners liable, it is best to separate liability
in contract from liability in tort.
The firm’s liability in contract
Section 5 of the Partnership Act explains the partnership’s liability under contracts made
by individual partners on behalf of the firm. This section takes the form of one very long
sentence, and if it is is read as a whole it can be difficult to understand. However, if the
section is broken down into its component parts it becomes relatively straightforward. First,
though, it is necessary to reproduce s. 5 in its entirety:
Every partner is an agent of the firm and his other partners for the purpose of the business of the
partnership; and the acts of every partner who does any act for carrying on in the usual way
business of the kind carried on by the firm of which he is a member bind the firm and his partners,
unless the partner so acting has in fact no authority to act for the firm in the particular matter, and
the person with whom he is dealing either knows that he has no authority, or does not know or
believe him to be a partner.Now we break s. 5 down into its component parts.
Every partner is an agent of the firm and his other partners for the purpose of the business of the
partnership...An agent has the power to make contracts on behalf of a third party, his or her principal,
as we saw in Chapter 6. Shop assistants, for example, are agents. They sell goods which
belong not to themselves, but to the shop owners for whom they work. Once a contract with
a customer has been made it is binding on the shop owner, not on the shop assistant.
Similarly, purchasing clerks and salespeople are agents. It is not their own goods which
they buy and sell.
So when the opening part of s. 5 states that partners are agents of the firm and of their
other partners, this is of enormous significance. It means that, no matter how disastrous a
contract one partner makes on behalf of the firm, all fellow partners will be completely
bound by the contract. If there are not enough partnership assets to honour the contract
then this liability will extend to each partner personally.
This agency of the partner only applies to contracts made ‘... for carrying on in the usual
way business of the kind carried on by the firm of which he is a member...’
This is a very important limitation. The firm will not be bound by all contracts made
by a partner on behalf of the firm. It will only be bound if the contract appeared to be
the type of contract which the firm would usually make in the course of its business, and
if the contract appeared to be made in the usual way one would expect such a contract to
be made.