Sie sind auf Seite 1von 17

DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY,

LUCKNOW

A PROJECT ON:
Rights and Duties of partners

Submitted to:
MR.PAWAN KUMAR PANDAY
Lecture
Dr. RML National Law University, Lucknow

Submitted by:
PALLAVI VERMA
ROLL NO. 79

LL.B(HONS.) SEC. B
ACKNOWLEDGEMENT
Behind any creative work, there are many people
without the help of whom that work cannot be
completed. I am heartily thankful to those persons
who have contributed in completion of this project

I would like to express my sincere thanks to respected


teacher of contract-II and others who helped me,
guided and extended moral support. I am also
thankful to the non teaching staff for being extremely
cooperative with me. However, as I have studied from
various sources, anything missing or incorrect due to
oversight is deeply regretted.

Thanking you!
CONTENT:
1. INTRODUCTION

2. DUTIES OF PARTNERS

a) General Duties of partners

b) Duty to attain greatest common advantage

c) Some aspect of fiduciary obligation

d) Due diligence

3. RIGHTS OF PARTNERS

a) Rights to take part in business

b) Majority rights

c) Right to indemnify

d) Right to profit

e) Right to interest

f) Right to remuneration
Rights and duties of partners
To fundamental principles govern relations of partners to one another. The first
principle gives the partners the free to sattle there mutual rights and duties by their
own voluntary agreement. The statement of duties and rights should be prefaced
with the contents of section 11 which gives freedom to partners, subject, of course, to
the provisions of the act, to determine their mutual rights and duties.

Section11- determination of rights and duties of partners by contract between the


partners-

Subject to the provision of this act, the mutual rights and duties of the partners of a
firm may be determined by contract between the partners, and such contracts may
be expressed or may be implied by a course of dealing.

Determination by contract

The second principle of high importance is that relations of partners to one another
are based upon the fundamental principle of absolute good faith. Mutual trust and
confidence among the partners, therefore, becomes a necessary condition of their
relations. Section 9 gives statutory recognition to this principle by providing that
partners are bound to be just and faithful to each other. This duty cannot be
excluded by any agreement to the contrary. In Helmore v. Smith: 1

In fiduciary relationship means anything I cannot conceive a


stronger case of fiduciary relations than that which exists between partners. Their
mutual confidence is the life blood of the concern. It is because they trust one
another that they are partners in the first place; it is because they continue to the
trust one another that the business goes on.

1
(1886) 35 Ch D 436 at 444.
Duties of partners:
All the duties of partners emerge from this overriding principle of good faith. The
following are some of them:

1. Duty of good faith(section.9)

General duties of partners-

Each partner owes to the others a duty of honest and good faith. This requirement of
mutual trust arises because they have all voluntarily constituted one another their
agents in relation to the partnership affairs.

The first and unchanging aspect is the obligation to be honest. But this does not
mean that a partner satisfies the duty by mere honesty; the duty has other
characteristic; he may be in breach of it without being dishonest or negligent, for
instance if he acts for an improper motive.

The Second aspect of the duty is the requirement of openness. A partner must
conceal nothing from his partners which is relevant to the firms business.

Thirdly, he must act in favour of the firm and not against it. He must not exercise for
his own advantage the powers which he holds as a partner only. He may not put
himself in a position which militates against discharge of his duty to the firm.

Fourthly, he must treat fairly a minority within the firm, for instance when
contemplating an expulsion.

Finally, he must not compete with the firm or make a profit at the expense of his
partner.
2) Duty to attain greatest common advantage

Thus all the endeavours of a partner must be to secure a maximum profit for the
firm. He should not try to make a secret profit for himself at the expense of the firm.
In Bentley v. Craven2

A partner in a firm of sugars refiners, who had great skill in buying sugar at the
right time, was entrusted to buy sugar for the firm. He supplied sugar from his
personal stock, which he had bought earlier when the prices were low. He charged
the prevailing market price and thus made a considerable profit.

When his co-partner discovered this, they brought an action for an account of the
profit. The firm was held entitled to that profit.

Similarly, where a partner, authorised to sell joint property for sold it to a company,
in which he had a large interest, for a much higher price and concealed the excess
price, he was held bound to share it with his co-partner. 3

3) Some aspects of fiduciary obligation : A number of aspects of partners fiduciary


obligation have found their way into the provisions of the Act, for example, the duty
not to draw any exclusive advantage by the use of the partnership property or
information4, the duty not to draw any benefit by engaging into transaction in
rivalry with the firm5; the duty not to divert the business opportunities of the firm to
his own advantage.6

2
(1853) 18 Beav 75: 104 RR 373.

3
Dunne v. English, 18 Eq 524 (1874).

4
Section 16, Dean v MacDowell, (1878) 8 Ch D 345, 354, and Gardner V Mc Cutcheon,(1842) 4 Beav 534: 55 RR
154; Williamson v Hine,[1891] 1 Ch 390; Benson v Heathorn,(1842) 1 Y&C Ch 326: 9 LT 118; Miller v Mackay,
(1865) 31 Beav 77: (1865) 34 Beav 295; Shallcross v Oldham, (1862) 2 J&H 609; Maffat v Farguharson, (1788) 2
Bro CC 338.

5
Section 16 and Somerville v Mackay,(1810) 6 Ves 382.

6
Section 16 and Russell v Austwick, (1826) 1 Sim 52.
4) Limits on the duty of good faith:

Trustees contrasted

The partners duty of good faith is not the same as, or as strict as, the duty imposed
by the law upon a trustee. Thus a partner may for his own benefit use property or
information belonging to the firm provided that it is not of value to the firm and he
does not use it in competition with the firms business. By contrast a trustee may not
use for his own benefit the property or information of the trust.

A partners accountability for his separate business

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.

Transactions in rivalry with firm

The principle is well established by the authorities that a partner is not to derive
any exclusive advantage by engaging in transaction in rivalry with the firm 7. Thus
where a firm is constituted to supply goods of a certain kind, a partner cannot carry
on a personal business of supplying the same stuff 8. It is also well established that a
partner is not allowed in transacting the partnership affairs to carry on for his own
sole benefit any separate trade or business which, were it not for his connection with
then partnership, he would not have been in a position to carry on 9. In Pulin v.
Mahindra10

A partner was founded between certain persons for importing salt from foreign
countries and to resale the same in Chittagong. One of the partners, while operating
to buy salt for the firm bought some quantity for himself and resold on his personal
7
See THESIGER LJ in Dean v MacDowell, (1878) 8 Ch D 345 at 355-56.

8
See Somerville v Mackay, (1810) 6 Ves 382: 10 RR 200; and Lock v Lynam, (1854) 4 Ir Ch Rep 188.

9
Thesiger LJ in Dean v MacDowell, (1878) 8 Ch D 345.

10
(1921) 34 Cal LJ 405.
account. He was held liable to account for this profit to his co-partners, as the
opportunity to make it came his way while he was on the business of the firm.

A partner may, however, carry on any personal work which is outside the scope of
the partnership business. In Aas v. Benham11

A partner in a firm of ship-brokers helped the formation of a company for building


ships. In so doing he used information which he had acquired as a member of the
firm. He received remuneration for his services and subsequently joined the
company as a director at a salary. He was sued for an account of these earnings.

But was held not liable as the formation of the company and the business of a
shipbuilding company were something entirely beyond the scope of the partnership.

Restriction on carrying on any other business

Ordinarily this kind of agreement, being in restraint of trade, is void under section
27 of the contract Act. But section 11 expressly declares that such an agreement such
be valid, notwithstanding anything contained in section 27 of the contract Act,
1872.

If a partner carries on any personal business in breach of this kind of agreement, he


may not be liable to account for his profits, but his co-partners may apply under
section44 (d) for dissolution of the firm on the ground of persistence breach of
agreement.

5) Due diligence [section-12(b) and 13(f)]

Section 12(b) declares that-Every partner is bound to attend diligently to his duties
in the conduct of the business.

In order to supplement this provision section 13(f) provides: 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.

11
[1891] 2 Ch 244.
Negligence means absence of care according to circumstances and wilful
negligence has been described as culpable negligence if the partner is guilty of
this degree of negligence and consequently the firm suffers a loss, he would be
bound to indemnify the firm for the same. But he will not be liable for mere errors
of judgement, or for acts done in good faith. A problem of this kind arose in Cragg
v. Ford 12

The plaintiff and the defendant were in business in partnership. Their business was
in dissolution. The defendant, being the managing partner the conduct of dissolution
was left to him. He was advised by the plaintiff to dispose of immediately certain
bales of cotton which constituted a part of the companys assets. But the defendant
said that that should be done at the end of the dissolution. By that time prices of
cotton went down materially and the goods realised much less then they would
done otherwise.

The court held that it was not wilful neglect. The defendant has no reason to
anticipate the sudden fall in prices.

The principle of this case has been followed by the Patna High Court in Sasthi
Kenkar v. Gobinda.13

In the suit for dissolution of a partnership and accountants, the defendants, who
were managing partners, were charged with negligence and contribution was failed
to sue certain firms for the price of coal supplied and consequently one of the claims
become time barred and other was lost due to the debtors insolvency.

They were held liable for the claim which had become time-barred. For the other
claim the court held that the firm was an old customer and the defendants
themselves learned it too late that it had become insolvent.

Duty to indemnify for fraud [section 10]

Every partner shall indemnify the firm for loss caused to it by his fraud in the
conduct of the business of the firm.
12
1 Y & CCC 280.

13
AIR 1919 Pat 386.
This section is another aspect of the basic duty of partners to the conduct themselves
fairly and honestly both towards their co-partners and persons dealing with the
firm. Where a partner falters from the path and loss is caused to the firm, he will
exclusively liable for the same. In Campbell v. Campbell14 one of the partners of a
distillery, who did not take part in the conduct of business, had to pay penalties
which were levied upon the firm in consequences of the purchase of illicit whisky.
The purchases were affected by the managing partners and the plaintiff partner had
no knowledge of them. They were held liable jointly and severally to indemnify him
against the amount so paid and interest on it. It was immaterial that the loss was
caused by acts of illegal nature, for the plaintiff had not taken any part in them, not
done anything which could be regarded as acquiescence, knowledge or consent.

Duty to render true account [section-9]

Partners are bound to each other by the principle of utmost good faith (uberrimae
fidei). This entails a duty of the partners towards each other to make a full and frank
discloser of facts affecting the affairs of the firm. In partial recognition of this
principle section 9 makes it a duty of the partners to render true accounts to every
other partner. This principle was laid in Law v. Law15

A partner has sold his share in the assets of the firm to his co-partner and
discovered subsequently that material information had been concealed from him. He
would have been entitled to set aside the sale but for the fact with knowledge of the
concealment and without insisting upon full discloser, he entered into an agreement
to modify the original bargain. The court found that the matter which escaped
consideration was no consequence to the firm.16

Proper use of property [section 15]

Application of the property of the firm- subject to contract between the


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

14
7 Cl & Fiss 166: (1834) 12 Sh (City of Seas) 573, Scot.

15
[1905] 1 Ch 140 at 157.

16
Rattan Lal v Janinder Prasad, AIR 1976 P&H 200.
for the purpose of the business. The section makes it a duty of the partners that the
property of the firm shall be held and used by them exclusively for the purpose of
the business of the firm.

Nature of liability for misappropriation -The failure of a partner to


submit an account of his doings in reference to the property of the firm may make
him liable to an action, but not to a charge of criminal misappropriation of property.
The reason was stated by the Supreme Court in Velji Raghavji v. State of
Maharashtra17 the appellant was the working partner of a firm. It was agreed
among the partners that he should carry on the work of realising the dues of the
partnership. On the allegation that he misappropriated certain sums and also failed
to deposit in the bank some collections, he was convicted for the offence of criminal
breach of trust under section 409, IPC. The Supreme Court acquitted him. Even if
there was a mandate to the appellant with respect to some dues to collect and
deposit them in bank, failure to do so would not constitute the offence, as the
appellant was also authorised by the partners to spend the money for the business of
the partnership.

Duty to account for personal profit [section 16]

Personal profits earned by partners- Subject to contract between the partners,-

a) 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 the 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.

17
AIR 1965 SC 1433: (1965) 2 SCR 429: [1965] 2 Cri LJ 431. The liability to account cannot be forcedby
committal or writ of attachment. See Piddocke v Burt, [1894]1 Ch343.
Duty not to use firm property for private business

. In Gardner v. mcCutcheon the captain of a ship, which was owned by him and
his co-partner, made considerable profit by making certain contracts, while the
ship was operating under charterparties.

He was held liable to account for such profit.

Information received as partner

The duty of a partner as to the exploitation of information received by him as a


partner was thus stated in Aas v. Benham18. To the same effect is Coffeys
Registered Design, Re.19 The firm was trading in home brewing materials. It was
buying and selling products manufactured by others. It was not manufacturing
such product itself. A partner of his own initiative developed a design for a
container for brewing beer. He was allowed to enjoy the benefits of his invention
and not to share them with his co-partners because his invention had nothing to
do with the scope of the partnership business.

Right of partners

Mutual rights and duties of partners depend upon the provisions of their
agreement. But subject to their agreement the law confers the following rights
upon all partners:

Right to take part in business [section 12(a)]

Every partner has a right to take part in the conduct of the business of the firm.
The privilege of participation in business must be used for promoting the interest

18
[1891] 2 Ch 244: 65 LT 25 CA; Dawson and Mason Ltd v Potter, [1986] 2 All ER 418, use of confidential
information. For other example of liability for gains made by use of information received while in position as
agent, etc. see, Boardman v Phipps, [1967] 2 AC 46; Regal (Hastings) Ltd v Gulliver, [1942] 1 All ER 378;
Industrial Development consultants Ltd v Colley, [1972] 1 WLR 443. As to how compensation is to be assessed
in such cases, see Seager v Copydex, [1969] 1 WLR 809.

19
1982 FSR 227.
of the firm and not for damaging it. Partnership agreement usually provide for
the exclusion of this right in the case of some partners.

Majority rights [section 12(c)]

When every partner has a right to be consulted in the formulation of business


policy, differences of opinion among the partners may arise.

12(c) any differences 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;

Resolving differences of opinion: A difference of opinion may relate either to-

(1) An ordinary matter

(2) A fundamental matter.

If the partners are divided over an ordinary matter connected with the business,
the same may be settled by a majority of the partners. But every partner shall be
given the right to express his opinion before the matter is decided. All matters
arising in connection with the execution of the agreed business of the firm fall in
this category and may be carried through by majority opinion. But where the
difference of opinion relates to a matter of fundamental importance, consent of
all the partners becomes necessary. Fundamental matters include the question of
any alteration of, or addition to, the business of the firm and the admission of a
new partner. The partnership deed may, however, provide that in all matters
majority opinion shall prevail.20 The manner in which majority powers should be
exercised was explained in Blisset v. Daniel.21 The plaintiff was working in
partnership with certain persons. It was proposed to appoint one of the partners
son as a co-manager of the firm.

20
Highley v Walker, (1910) 26 TLR 685.

21
(1853) 10 Hare 493: 90 RR 454.
The plaintiff objected. The aggrieved father complained to his partners behind
the back of the plaintiff and persuaded them to sign and serve upon the plaintiff
a notice of expulsion. This was done in the exercise of a power which authorised
a majority to expel any partner without giving the reason.

Access to books [s. 12(d)]

Every partner has a right to have access to and to inspect and copy any of the
books of the firm.

A partner may exercise this right himself of by agent, but either can be restrained
from making use of the knowledge thus gained against the interest of the firm. A
partner can have the account inspected through an agent and need not to do it
personally. For example, where a sleeping partner wanted to sell his interest to
the other partners and authorised an expert vaguer to inspect accounts to
ascertain the value of his interest, it was held that the other partner could not
object to it, unless they could show some reasonable grounds for their objection
such as, for example, protection of trade secrets.22

Right to indemnify [section 13(e)]

The firm shall indemnity a partner in respect of payments made and liabilities
incurred by him:

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

ii. 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.

Two kinds of indemnity:


22
Beavan v Webb, [1900-3] All ER Rep 206.
In the first place, a partner is entitled to recover from the firm any expenses incurred
by him in the ordinary and proper conduct of the business. In Thomas v.
Atherton.23 T, the managing partner of a colliery, received notice from L, an
adjoining owner, that the workings were being carried on beyond the boundary. T
insisted that he was entitled to the disputed ground, and carried on his working. The
matter, having been referred to attribution, he was held liable to pay damages for the
trespass. His claim for contributions from his co-partners failed as the loss was not
suffered in the ordinary and proper conduct of the business.

He worked beyond the limits of the partnership colliery without proper inquiry
as to limits and had acted with gross negligence and recklessness is continuing his
working after notice and without consulting his partner, when it was evident that his
right to work in the disputed area was extremely doubtful.

The second kind of indemnity is recoverable when a partner has done an act
involving expenditure in order to protect the property of the firm a loss threatened
by an emergency. It is necessary that the partner concerned should have acted as a
reasonable person would have acted in his own case.24

The right to indemnity is not lost by the dissolution of the firm and it also does not
matter that there is or has been no settlement of accounts.25

Right to profits [section 13(b)]

Unless otherwise agreed, partners are entitled to share equally in the profits earned
by the firm. Similarly, they are bound to contribute equally in the losses sustained in
the course of the business of the firm. This would be so even where there is
disproportionate capital contribution or some of the partners render extraordinary
services.26

23
(1877) 10 Ch D 185.

24
Proof of actual loss attribution to the conduct of a partner is necessary and not merely one which is merely
imagined or notional. T.B.Mody v. Sanghrajka, AIR 1987 Kant 268.

25
Sadhu Narayana Aiyangar v. Ramaswami, ILR 32 Mad 203: 3 IC 489.

26
Mansha Ram v. Tej Bhan, AIR 1958 Punj 5.
Right to interest [section 13(c) and (d)]

If a partner has advanced, for the purpose of the firm business, a sum of money
beyond the capital he has agreed to subscribe, he is entitled to interest on the
advance at the rate of 6 percent per annum.

13(d) a partner making, for the purpose of the business, any payment of advance
beyond the amount of the capital he has agreed to subscribe, is entitled to interest
thereon at the rate of six percent per annum.

Right to remuneration [section 13 (a)]

Unless otherwise agreed, partners are not entitled to receive salary or remuneration
for taking part in the conduct of the business. Section 13(a) so provides:

A partner is not entitled to receive remuneration for taking part in the conduct of the
business.

The partnership agreement may, however, provide for the payment of remuneration
to working partners.27 But even so a firm cannot be regarded as an employer of a
partner. A contract of service stipulates two different persons whereas a firm and its
partners are one and the same thing. The so-called remuneration paid to the partners
is in reality a distribution of profits.28 It has been observed that in the united states,
great Britain and Australia, a partner is not treated as an employee of his firm
because he receives a wage or remuneration for work done for the firm. Even where
a partner renders extra-ordinary services29, in the absence of an agreement, he cannot
claim remuneration for such services. The Sind high court acted upon the same
principle in a case where a licensed partner and the other unqualified partner was
doing nothing. Even so no remuneration was allowed to the qualified partner. 30 It is
well known principle that under ordinary circumstances the contract or partnership

27
Garwood s Trusts, Re, [1903] 1 Ch 236. Income Tax Act,1961 also now recognizes such payments as an
expences provided the payment is to a working partner and in accordance with partners agreement.

28
C. V. Mulk v Commr of Agricultureal Income Tax, 1980 Ker LT 933.

29
Shelat Bros v Nandlal Harilal Shelat, AIR 1973 Mad 78.

30
Hassannand Jethamal v Bassarmal, AIR 1928 Sind 146.
excludes any implied contract for payment for services. 31 In the absence of an
agreement one partner cannot charge his co-partners with any sum for
compensation in the form of salary or otherwise 32, even where the services rendered
by the partners were exceedingly unequal.33

BIBLIOGRAPHY

1) Law of Partnership by Dr. Avatar Singh

2) www.Futureaccountant.com

31
Thompson v Willamson, (1831) 7 Bligh (NS) 432.

32
Whittle v MFarlane, (1830) 1 Knapp 311.

33
Webster v Bray, (1849) 7 Hare 159 and Robinson v Anderson, (1855) 20 Beav 98.

Das könnte Ihnen auch gefallen