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A PROJECT ON:
RightsandDutiesofpartners

Submitted by:
PALLAVIVERMA

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CONTENT:
1.

INTRODUCTION

2.

DUTIESOFPARTNERS

3.

1)

GeneralDutiesofpartners

2)

Dutytoattaingreatestcommonadvantage

3)

Someaspectoffiduciaryobligation

4)

Duediligence

RIGHTSOFPARTNERS
1)

Rightstotakepartinbusiness

2)

Majorityrights

3)

Righttoindemnify

4)

Righttoprofit

5)

Righttointerest

6)

Righttoremuneration
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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
partnersSubject 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:

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

(1886) 35 Ch D 436 at 444.

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another that they are partners in the first place; it is because they
continue to the trust one another that the business goes on.

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 partnersEach 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.
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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 copartner.

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
4

use of the partnership property or information , the duty not to draw any
benefit by engaging into transaction in

(1853) 18 Beav 75: 104 RR 373.

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

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.

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5

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 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
7

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
8

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
5

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

Section 16 and Russell v Austwick, (1826) 1 Sim 52.

See THESIGER LJ in Dean v MacDowell, (1878) 8 Ch D 345 at 355-56.

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

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9

then partnership, he would not have been in a position to carry on . In


Pulin v.
Mahindra

10

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

11

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 copartners may apply under
9

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

10

(1921) 34 Cal LJ 405.

11

[1891] 2 Ch 244.

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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

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.
12

1 Y & CCC 280.

13

AIR 1919 Pat 386.

13

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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.
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

14

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

14

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

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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

15

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 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

17

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
15

[1905] 1 Ch 140 at 157.

16

Rattan Lal v Janinder Prasad, AIR 1976 P&H 200.

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.

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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,-

1) 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;
2) 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

18

. To the same

effect is Coffeys
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.

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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 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-

19

1982 FSR 227.

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(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.
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
20

Highley v Walker, (1910) 26 TLR 685.

21

(1853) 10 Hare 493: 90 RR 454.

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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,
22

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:
1.

In the ordinary and proper conduct of the business, and

2.

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
23

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.
22

Beavan v Webb, [1900-3] All ER Rep 206.

23

(1877) 10 Ch D 185.

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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

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.

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.

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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 services

29

, 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 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

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.

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.

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BIBLIOGRAPHY
1) Law of Partnership by Dr. Avatar Singh
2) www.Futureaccountant.com

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