Learning Outcomes
After studying this article, you will be able to explain how partners make decisions in a general partnership, distinguish between actual and apparent authority, assess when the partnership is bound by a partner’s actions, and advise on partner and firm liability to third parties. You will understand the role of partnership agreements, the default statutory rules, and how to apply these principles to SQE2-style problem scenarios.
SQE2 Syllabus
For SQE2, you are required to understand the legal principles governing partnership decision-making and the authority of partners. These concepts will often form part of questions involving business organisations.
As you revise this article, focus especially on:
- the difference between actual authority and apparent (ostensible) authority of partners
- when a partnership is liable for contracts and torts entered or committed by its partners
- the impact of partnership agreements versus default Partnership Act 1890 rules
- the requirements for holding out liability and protection for outgoing partners
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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In the absence of a written partnership agreement, which of the following need unanimous consent from all partners?
- entering a new business line
- routine purchase of trading stock
- appointment of a new partner
- day-to-day management decisions
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A partner contracts with a supplier for a service that is outside the usual business of the partnership. When, if ever, will the firm be bound?
- If the partner has actual authority only
- If the partner has apparent authority and the third party did not know about any limitation
- Always
- Never
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True or false? If a partner acting without authority binds the partnership, only that partner is liable to the third party.
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What is the test for apparent (ostensible) authority of a partner?
Introduction
This article explains how decisions are made in an ordinary partnership, how partners can bind the partnership, and the liability consequences of those actions. For SQE2, you must confidently apply the law of agency to the context of partnerships, distinguishing between different types of authority and knowing the scope of the rules which protect partners, clients, and third parties.
Partnership Agreements and the Statutory Framework
Partners may set out their own rules for decision-making in a partnership agreement. In the absence of such agreement, the Partnership Act 1890 provides default rules. Certain decisions always require unanimous consent (e.g., admission of a new partner, change in nature of business, changing the partnership agreement), while most day-to-day management can be decided by majority.
Key Term: partnership agreement
A contract (written or oral) between partners, setting out rules for managing the business, sharing profits/losses, and authority.
Authority of Partners
Actual Authority
Each partner is an agent of the firm and of the other partners for partnership business. A partner has actual authority to bind the partnership if expressly given by the partnership agreement, or implied by the partners’ conduct or established custom.
Key Term: actual authority
The right conferred on a partner by the partnership agreement, or by implication from the conduct of the partners, to act on behalf of the firm.
Apparent (Ostensible) Authority
Even if a partner lacks actual authority, the firm may still be bound if the act was within their apparent authority and the third party had no notice of limits. This relies on whether a partner would normally be expected to do the act in a business of that nature.
Key Term: apparent authority
The power for a partner to bind the firm if a third party reasonably believes the partner acts for the firm in the ordinary course of its business, and lacks notice that the partner lacks authority.
Worked Example 1.1
Edwina and Rick are partners in an antiques shop partnership. Rick, without consulting Edwina, agrees to purchase a collection of stamps for resale in the shop. Edwina objects, claiming Rick had no authority to buy stamps. Is the partnership bound to complete the purchase?
Answer:
Yes. Even if Rick lacked actual authority, purchasing stock is an act done in the usual course of business for an antiques shop. Unless the seller knew Rick lacked authority, the purchase is within Rick’s apparent authority. The partnership is therefore bound by the contract.
Partner Liability for Debts
Each partner is jointly liable for the firm’s obligations and debts incurred while a partner, including those arising from contracts entered with actual or apparent authority. Partners may also be held liable for wrongful acts (torts) committed by any partner in the ordinary course of business or with authority.
Key Term: joint and several liability
Partners are both collectively (jointly) and individually (severally) liable for debts of the firm and for wrongful acts of other partners in the course of business during their period as partner.
Protection for Outgoing and Incoming Partners
An incoming partner is liable only for obligations incurred after joining the firm, unless they agree otherwise. An outgoing partner remains liable for debts and wrongful acts incurred before departure, and for future debts unless they give notice of retirement to those who deal with the firm.
Worked Example 1.2
Susan retires as partner from Apex Design LLP. She does not notify existing clients or place an advert in a national publication. New contracts are entered after her retirement, using old stationery listing her as a partner. Is Susan liable?
Answer:
Likely yes. Because actual notice was not given to known clients, and public notice was not given for new clients, Susan may be treated as still being a partner. She can be liable for contracts formed after retirement by operation of “holding out”.Key Term: holding out
When a person represents themselves, or allows themselves to be represented, as a partner, they can be treated as a partner and become liable to third parties who relied on that representation.
Limiting Partnership Liability
If a partner acts outside both their actual and apparent authority (and the third party is, or ought to be, aware of the lack of authority), the firm is not bound, and the partner alone is personally liable to the third party for breach of a warranty of authority.
Worked Example 1.3
Lee, a partner in a bakery, contracts to buy video games for resale, which is outside the usual course of a bakery’s trade. The supplier had reason to think Lee was not acting for the bakery. Is the bakery bound?
Answer:
No. Buying video games is not in the ordinary course of a bakery’s business, and the supplier knew or ought to have known Lee was not authorised. Only Lee is liable to the supplier.
Exam Warning
If you face a scenario where a partner has acted outside the scope of the usual business and without authority, check carefully whether a third party could reasonably attribute their act to the partnership.
Relationship of Partners to Each Other
Partners owe each other duties of honesty, good faith, and disclosure. Many practical difficulties stem from partners exceeding, or acting inconsistently with, agreed internal limits. A partner who binds the firm but acts outside actual authority may be required to indemnify the firm/partners for any resulting loss.
Revision Tip
When revising, focus on distinguishing between what binds the partnership (apparent/actual authority) and what creates private disputes between partners only.
Key Point Checklist
This article has covered the following key knowledge points:
- Actual and apparent authority are the main bases for partnership decision-making power
- Acts in the usual course of business will bind the partnership unless the third party knew of any limits on authority
- Partners are jointly liable for contracts and torts entered into or committed by any partner within authority or usual business
- A partnership agreement can alter or exclude certain statutory rules, but specific acts (e.g., admitting new partners) still require unanimous consent
- Outgoing partners can remain liable unless proper notice of departure is given
Key Terms and Concepts
- partnership agreement
- actual authority
- apparent authority
- joint and several liability
- holding out