Ch. 2 : Partners & Outsiders

Remark: this topic is important to preserve the 3 rd parties’ right instead of the

partner’s interest

ContentsI. POWER OF A PARTNER TO BIND THE FIRM...................................................2

1. Actual authority : s. 9.............................................................................................22. Usual authority : S.7...............................................................................................23. Apparent authority : S. 13......................................................................................3

II. WHAT TYPE OF PARTNERS ACTION WILL BIND THE FIRM AND OTHER PARTNERS?.............................................................................................................3

A. Act in relation to partnership business (Act done with Actual Authority) – S 9: Partner using credit of firm for private purpose.................................................................................3B. Act for carrying on business in usual way (act done with usual authority)...................4C. Act to be done as a partner, so partners bound by act on behalf of the firm..................6

III. LIABILITY OF THE FIRM.......................................................................................7A. s 12 covers tort liability, equitable liability and criminal liability.................................7B. S 13 : Misapplication of Money/property of the 3rd Person received for or in custody of the firm...............................................................................................................................7

IV. S 14 : MODE OF LIABILITY FOR TORT OFFENCES AND OTHER WRONGS (FOR SECTION 12 AND 13)...............................................................................9

1. Jointly.....................................................................................................................92. Severally.................................................................................................................9

V. IMPROPER EMPLOYMENT OF TRUST PROPERTY FOR PARTNERSHIP PURPOSES.............................................................................................................................10VI. S 11 : MODE OF LIABILITY FOR CONTRACT.................................................10VII. LIABILITIES OF INCOMING AND OUTGOING PARTNERS........................10VIII. PERSONS LIABLE BY ‘HOLDING OUT’ S 16....................................................12

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I. POWER OF A PARTNER TO BIND THE FIRM(why a partner’s action will bind the firm/other partners?)

A. POWER CAN BE SEEN IN THE CATEGORIZATION OF AUTHORITY

1. Actual authority : s. 9

a) Maksud actual : agent boleh bind his principle if he is specially

authorized as seen in section 9.

2. Usual authority : S.7

(elements which must be satisfied for the act of the partner to bind the firm

and other partners)

a) Interpretation of Section 7 :

each partner in an agent to other partner.

Each partner when contracting with outsiders are agents and

principals at the same time unless the proviso applies

If a partner who is not authorised to act on behalf of the firm for

any transaction, and the third party knows about it, and if the third

party goes on to contract with the unauthorized partner, the other

partners cannot be held liable for his unauthorised act.

b) Note: usual authority is depends on the nature of agency

c) Kes : Chang Kin Yue v Lee & Wong

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Requirementsthe act must be done in relation to the partnership businesscarrying on usual way of businessthe act must be done in the capacity as a partner and not as an individual person.

UNLESS

ProvisoThe partner has no authority ANDthe person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

Facts: The firm run a business of electrical engineering. A partner

make a loan.

Issue: does the partner has the authority to do so?

Held: since the nature of the agency is non-trading partnership thus the

court held that there is no usual/ implied authority for him to make a

loan

3. Apparent authority : S. 13

a) Maksud: Authority that arises from representation made by

principals

b) Osman v Chang Kan Sui

Facts : 3 managing partners + 3 sleeping partners form a firm. MP buat

loan and SP jadi guarantor. Bila money lender sued, 3rd party paid, and

now he want to claim from the firm

Held: Upon the promissory note, it appears as the note of the firm

instead of MP only, thus the firm is liable.

II. WHAT TYPE OF PARTNERS ACTION WILL BIND THE FIRM

AND OTHER PARTNERS?

A. ACT IN RELATION TO PARTNERSHIP BUSINESS (ACT DONE WITH ACTUAL

AUTHORITY) – S 9: PARTNER USING CREDIT OF FIRM FOR PRIVATE PURPOSE

1. Concept : if a partner uses the fund of the firm for his personal

purposes which is not connected with the ordinary course of business, than the

other partners will not be liable for his act, but if it was specially authorised

(actual authority) by the other partners therefore all the partners can be made

liable.

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2. Proviso : but this section does not affect any personal liability incurred

by an individual partner. It means even though the firm is not liable, the

liability of default partner remained exist

3. Section 10: If it has been agreed between the partners that any

restriction shall be placed on the power of any one or more of them to bind the

firm, no act done in contravention of the agreement is binding on the firm with

respect to persons having notice of the agreement

4. London Chartered Bank of Australia v Kerr

Fakta : the firm is liable since the other partners failed to object to X’s action

who drawed partnership cheques to meet his personel matter 6 months before

a bill. This failure to object represents that X was authorised to borrow

partnership funds to meet his personel debts.

Plus, the 3rd party x boleh terima bill daripada partner yang draw the bill of

partnership for private purpose sebab 3rd party tahu that bill is for private

purpose melainkan the other partners by words or conduct indicates that X is

authorized to do so.

B. ACT FOR CARRYING ON BUSINESS IN USUAL WAY (ACT DONE WITH USUAL

AUTHORITY)

1. sekiranya partner buat something yang in the ordinary course but in

extraordinary manner,

a) the partnership will not bound and

b) the 3rd party has the duty to inquiry the authority of a partner to

act in such manner.

c) Tapi ada cara untuk untuk partner yg act extraordinarily,

towards 3rd party, untuk menyebabkan other partners liable.

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2. Suffin J dalam kes Chan Kin Yue v Lee & Wong

Cara tersebut ialah regardless that act is not usually done in carrying in the

course of the business (ex: act without mandate), it is nevertheless, necessary

for carrying the partnership business

Facts of the case: In this case, it is a necessary for the partner to make loan

because the firm is owing over RM 100,000 and the firm’s account overdrawn

thus making a loan is the best way for carrying on the partnership business.

3. Trading partnership

It is usual in trading partnership for a partner to borrow money and to purchase

n sell trading stock

a) Mercantile Credit v Garrod [1962]

Fakta : melibatkan firma/ perkongsian yang menyewakan lokap garaj

dan baiki kereta. Dalam partnership agreement tu dah clearly stated

yang any partner x leh jual or beli kete tapi salah satu partner tetap jual

kepada a credit company tanpa kebenaran partner yang lain, Garrod

(partner yg x bersalah). So bila credit company found out yg kete tu

sebenarnya bukan partner yg bersalah tu punya, dia nak sue Garrod.

Held : it is ordinary for this type of firm to sell cars, so Garrod liable as

a partner

4. Non-trading partnership (maksudnya partnership yang tidak

melibatkan jual beli barang dan melibatkan jualan perkhidmatan sahaja)

a) Higgins v Beauchamp [1914] – the position has been

challenged by recent cases

Fakta : melibatkan cinema operator firm dan keadaan di mana B

adalah sleeping partner while another partner named Miles. Mile buat

loan from Higgins kononnya untuk bisnes padahal dia misapply it.

Skrg ni Higgin nak sue B utk ganti balik duit dia.

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Isu : adakah perbuatan partner buat hutang dengan bank itu boleh

dikategorikan sebagai satu perkara yang biasa? Dan adakah sleeping

partner akan turut liable?

Held : only partners of a firm which the nature is to possess an asset

(trading partnership) can make a loan because there is implied

authority for them to enlarge the economy of the firm. Tapi dalam kes

ni, it is not a trading partnership sbb dia provide servis sajoh.so, B x

liable

C. ACT TO BE DONE AS A PARTNER, SO PARTNERS BOUND BY ACT ON BEHALF

OF THE FIRM

1. S 8 : An act or instrument relating to the business of the firm and done

or executed in the firm name or in any other manner showing an intention to

bind the firm, by any person thereto authorised, whether a partner or not, is

binding on the firm and all the partners….”

2. Re Briggs & Co, Ex parte Wright [1906]

Fakta : partnership yang terdiri daripada ayah dan anak. Anak forged nama

ayah masa tandantangan deed of assignemnt untuk bayar hutang pada creditor

Isu : adakah ayah akan liable?

Held : yes sbb tujuan anak dia buat macam to for the sake of the partnership

and was excuted by a partner , anak tu.

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III. LIABILITY OF THE FIRM

A. S 12 COVERS TORT LIABILITY, EQUITABLE LIABILITY AND CRIMINAL

LIABILITY

1. Hamlyn v Houston & Co [1903]

Fakta: D telah memberi rasuah kepada kerani P bagi memperoleh maklumat

mengenai firma B

Isu : Adakah partners dalam firma D akan bertanggungan ke atas kesalahan D?

Held : Yes, they are liable because an act to obtain informations about

competitor can be considered as in the ordinary course of their business,

whether the act is legal or illegal is not an issue.

B. S 13 : MISAPPLICATION OF MONEY/PROPERTY OF THE 3RD PERSON

RECEIVED FOR OR IN CUSTODY OF THE FIRM

1. Receipt by a partner: 13(a) : Where one partner, acting within the

scope of his apparent authority, receives the money or property of a third

person and misapplies it…the firm is liable to make good the loss

a) Firm is liable only if partner who actually receives the money

misapplies it.

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Compulsory element :If any partner commit or omit any wrongful act

Optional element : in the ordinary course of the business of the firm ORwith the authority of his co-partners

loss or injury is caused to any outsider, the firm is liable to the same extent as the partner who commit/omit the wrongful act

b) Not necessary that the partner applies to its own purpose, firm

would still be liable if the moneys or property of one client were

applied for purpose of another or for the firm’s purpose.

c) Apparent authority does not just mean authority created by

representation of words or conduct, it also means authority derived

from nature of business and status of partner.

d) National Commercial Banking Co Ltd v Batty

An accountant who was appointed executor of a client’s will and in

that capacity misappropriated a business’s assets by banking its

cheques to credit of his firm’s trust account and subsequently diverting

the proceeds to his own use. The court held that the firm was not liable

for the executor’s actions because they were not within the scope of the

partner’s apparent authority and it had not received the money in the

course of the ordinary course of business of an accountancy practice.

2. Receipt by firm : 13 (b) : Where a firm in the course of its business

receives the money or property of a third person, and the money or property so

received is misapplied by one or more of the partners while it is in the custody

of the firm…the firm is liable to make good the loss.

a) Rhodes v Moules [1895] – illustrates the overlapping of the

sections 13(a) and (b)

Fakta: plaintiff who wanted to raise money by way of a mortgage on

his property thus, he asked for a solicitor, a partner to law firm to help

him. The solicitor told him that the lender asked for additional security

but turned out the solicitor misappled the warrants, so plaintiff sued

firm under Section 13.

Isu : adakah firm liable?

Held : yes sbb the certificates were received in the ordinary course of

the firm’s business

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IV. S 14 : MODE OF LIABILITY FOR TORT OFFENCES AND

OTHER WRONGS (FOR SECTION 12 AND 13)

A. CONCEPT

1. Every partner is liable jointly with his co-partners and also severally

for everything for which the firm is liable while he is a partner in it under

section 12 or 13.

B. CHUNG SHIN KIAN V PP [1980] –ADAKAH SECTION NI TERPAKAI UNTUK

CRIMINAL LIABILITY

1. Fakta : melibatkan firma yang melibatkan aktiviti penampalan yang

telah infringe someone’s copyright. A telah ditangkap semasa menampal dan

dia cuba untuk mengheret sama partner B sedangkan semasa penangkapan, B

tidak berbuat apa2.

Held : kalau untuk kes jenayah, charge kena bawak satu2.

C. IT’S A MATTER OF STRATEGY EITHER WANT TO CLAIM UNDER JOINTLY

LIABLE/ SEVERALLY LIABLE (KENDALL V HAMILTON)

1. Jointly

satu tindakan yang akan impose liability to all partners at one time only. If an

action is brought against a partner of some of the partners and they were found

liable and judgment is entered, no further can be brought to other partners who

were jointlty liable even if the judgment remains unsatisfied

2. Severally

allow to file an action to claim for liablity in several time. 1st action may

involve partner A and B while 2nd action may involve partner A,B and C. If

judgment in an action is not fully satisfied, another action may be maintained

against each of the partner

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V. IMPROPER EMPLOYMENT OF TRUST PROPERTY FOR

PARTNERSHIP PURPOSES

A. S 15 OF PA 1961

If a partner, being a trustee, improperly employs trust property in the business or on

the account of the partnership, no other partner is liable for the trust property to the

person beneficially interested therein:

Provided… (a) this section shall not affect any liability incurred by any partner by

reason of his having notice of a breach of trust; and

Nothing in this section shall prevent trust money from being followed and recovered

from the firm, if still in its possession or under its control.

1. Note: This section imposes a duty to all partners to stop any partner

who attempt to commit or committing breach of trust.

VI. S 11 : MODE OF LIABILITY FOR CONTRACT

1. Every partner in a firm is liable jointly with the other partners for all

debts and obligations of the firm incurred while he is a partner…

2. Note: this sections applies only to debts and contractual obligations

3. Bagel v Miller [1903]

Held: a deceased partner’s estate was held to be not liable under contract of

goods sold and delivered because it was entered into before his death

VII. LIABILITIES OF INCOMING AND OUTGOING

PARTNERS

A. INCOMING PARTNERS: S 19 (1)

A person who is admitted as a partner into an existing firm does not thereby become

liable to the creditors of the firm for anything done before he became a partner.

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1. Therefore any debts contracted before he joined the firm are to be

shouldered by his co-partners alone. However the Partnership Act does not

impose any restriction or prohibit ant incoming partner from concluding an

agreement whereby he holds himself liable to the firm’s creditors for debt

contr4acted while he was the partner of the firm

B. OUTGOING PARTNER: S 19(2)

A partner who retires from a firm is liable for partnership debts or obligations

incurred before his retirement.

1. Court v Berlin [1897]

Court was a solicitor retained by partnership to recover debt due to it. Firm

consisted of Berlin, the sole active partner and 2 dormant partners. During the

solicitor’s work for the firm, the 2 dormant partners retired. After the

proceeding for recovery of debt were completed, the solicitor sued Berlin and

the former partners for his costs. Dormant partners claimed that they were

only liable for costs incurred up to the date of their retirement. They were

indeed fully liable. Contract entered into whilst they were partners was one

entire contract to conduct the action to the end; the solicitor did not need to

come for fresh instructions at each step of action. Dormant partner’s liability

for costs was for all the costs in the action.

Concept: single continuing contract, former partner remains liable and new

partner is exempted

C. GUARANTEES: S 20

A continuing guarantee given either to a firm or to a third person in respect of the

transactions of a firm is, in the absence of agreement to the contrary, revoked as to

future transactions by any change in the constitution of the firm to which, or of the

firm in respect of the transactions of which, the guarantee was given.

D. FUTURE DEALINGS: S 38(1)

Where a person deals with a firm after a change in its constitution, he is entitled to

treat all apparent members of the old firm as still being members of the firm until he

has notice of the change.

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1. Seksyen ni kena baca seiring dengan seksyen 38 (3), retired partner

akan relieve from any liability sekiranya pada masa urusan 3rd party dengan

partnership itu berlaku, dia tidak diketahui oleh 3rd bahawa dia merupakan

partner.

2. Elders Pastoral Ltd v Rutherfurd

The person sought to be made liable was known to the creditor before actual

retirement to have been a partner. Knowledge in that sense would we think

include belief arising from general notoriety or use of names on letterheads,

advertisement and the like. Next, former partner must still be an apparent

member. Ordinary meaning of apparent is visible, evident, manifest to the

understanding.

3. Tower Cabinet Co Ltd v Ingram [1949]

For retired partner to be liable, what was once actually known to the person

dealing with firm must continue to appear to be true, although it has in fact

ceased to be true.

VIII. PERSONS LIABLE BY ‘HOLDING OUT’ S 16

A. THE BASIS OF THE DOCTRINE: ESTOPPEL. IT MEANS

1. S16 holding out, apparent partner are preferable to one who represents

himself, or knowingly suffers himself to be represented as a partner.

2. A retired partner who gives no notice may be an apparent partner if his

name continues to be used which he can prevent by giving notice of

retirement.

3. However, he cannot be said to be apparent partner because former

partner says he is still a partner.

4. PP v Wong [1991] 3 CLJ 2188

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