Relations of Partners Inter Se:

Rights & Duties of Partners

Rahul Kumar1

ABSTRACT:

The fundamental principles govern relations of partners to one another. The first principle
gives the partners the free to settle their 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. endnote 1

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. Smithendnote2:“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.”

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 of the firm and not for
damaging it. Partnership agreement usually provide for the exclusion of this right in the case
of some partners.
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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.
The manner in which majority powers should be exercised was explained in Blisset v. Daniel.
The plaintiff was working in partnership with certain persons. It was proposed to appoint one
of the partner’s son as a co-manager of the firm.

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.

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: 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. 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.

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.

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.

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. 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. 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 services , 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. “It is well
known principle that under ordinary circumstances the contract or partnership excludes any
implied contract for payment for services. 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 ,
even where the services rendered by the partners were exceedingly unequal.”

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 firm’s 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.
Craven

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) Some aspects of fiduciary obligation : A number of aspects of partner’s 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 information , the duty
not to draw any benefit by engaging into transaction in rivalry with the firm ; the duty not to
divert the business opportunities of the firm to his own advantage.

4) Limits on the duty of good faith:

Trustees contrasted:The partner’s 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 firm’s business. By contrast a trustee may not use for his
own benefit the property or information of the trust.

A partner’s 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 .” 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 . 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 ”. In Pulin v. Mahindra

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 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. Benham

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.

“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

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 company’s 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.

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 debtor’s 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.

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. Campbell 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. Law: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.

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 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 Maharashtra – 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.

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. Benham . To the same effect is Coffey’s Registered Design, Re. 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.