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Relationship of a firm and its partners to a third party

Liability of a firm and its partners to a third party can be discussed under following two heads:
  • Notice to an active partner: Notice or information given to an active partner is a constructive notice to the firm. This rule is based on the principle of agency which states that a notice given to the agent is a notice given to the principal.
  • Representation or admission made by the firm: When a partner of the partnership firm makes an admission or representation of certain affairs of the firm to a third party then it is constructed that such admission or representation is made by the firm.
  • Liability for wrongful acts of partners: A firm is liable to the third parties for all the wrongful acts of a partner. However, the firm is liable if such acts are done in the ordinary course of business of the firm. The term ‘wrongful’ act includes fraud, negligence or tort. Thus, when any third party dealing with the firm suffers a loss from the wrongful act done, the firm is liable for the loss suffered if it is done:
    • In the ordinary course of business of the firm, or
    • With the authority of all the other partners
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Note: When a partner has caused loss to the firm by his misconduct or wrongful act, the other partners can recover compensation from the guilty partner

  • Liability for misapplication of money or property by a partner: This provision is contained in Sec. 27 of the Indian Partnership Act which lays down the following two rules in this regard:
    • When money or property is received by a partner and then misapplied by the same partner
    • When money or property is received by the firm and then misapplied by any of the partners
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