Contract of Partnership – Indian Partnership Act, 1932
Meaning of Partnership
According to the Section 4 of the Indian Partnership act , 1932, ‘Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.
A partnership consist of the following elements –
- Relation between the persons
- Agreement between the persons
- Sharing profits with one another
- Carrying a business
- Business is carried on by all or any of them acting for all i.e., the mutual agency
- ( Also Read: Limited Liability Partnerships In India – An Overview )
- ( Also Read: THE INDIAN PARTNERSHIP ACT, 1932: AN OVERVIEW )
- ( Also Read: The rights and duties of a Partnership firm in the legal perspective )
- ( Also Read: MINORS AS PARTNERS )
Essentials of Partnership –
According to Section 4, the essentials required to constitute a Partnership are :
- An agreement between two or more than two persons.
- Partners must carry on of business
- The motive of the partnership is to share profits.
- The business must be carried on by all of them or any of them acting for all, i.e., mutual agency
When all these essentials are satisfied, then only a relationship that is known as ‘partnership’. Persons who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’ and the name under which their business is carried on is called the ‘ firm name’ (Section – 4).
Agreement for a partnership
Partnership arises from an agreement between two or more than two persons. Here, agreement has the voluntary contractual nature which can be obtained either expressly or impliedly. In Tarsem Singh v Sukhminder Singh, it was held that it is not necessary under the law that every contract must be in writing. There can be an equally binding contract between the parties on the basis of oral agreement, unless there is a law which requires the agreement to be in writing.
Also if the basis of a relationship is not an agreement, then that association would not be considered as a partnership because there is no presence of partnership. Even Section 5 of Indian Partnership act, 1932 supports the same, which says that – ‘Partnership arises from a contract not from a status’.
Persons capable of becoming Partners
- Minor – A Minor could not become a partner but with the consent of all partners he can be admitted to the benefits of Partnership. (Section 30)
- HUF – Hindu Undivided Family (HUF) cannot become a partner. Section 4 talks about ‘PERSONS’ which means an individual, not a body of persons.
- Partnership Firm – Partnership arises from the PERSONS. A Partnership firm is not legal person and such a person is not capable of entering into partnership with other firms or individual.
- Company – Section 4 permits a person to enter into partnership. Person can be natural or artificial. A partnership could be between the companies.
- Insolvent person – Section 4 does not clearly mention that a solvent person will come into partnership but Section 34 states that as the partner become insolvent, he cease to become a partner. Here, two situation arises –
- A person who is insolvent – He cannot become a partner
- A person who was solvent but after coming into partnership becomes insolvent – In such a case, a partner cease to be a partner.
Carrying of Business
The object of a Partnership is to carry a business and to share the profits among them. But this Business should not be unlawful. According to the Section 2 (b), business includes every trade, occupation or profession. It includes every kind of commercial activity that aimed at learning.
Note – If some persons join together to make a bulk purchase of a good to distribute amongst themselves and thereby gain personal advantage of that bulk purchase, then it is not carrying on of the business as there is no intention to earn profits, therefore, there is no partnership.
Sharing of Partnership
The main objective of a partnership is to share the profits among the partners which is earned from a business carried out by them. Although sharing of profit is an important essential but every person ho shares the profit doesn’t mean that they become partners.
In Cox vs. Hickman, it was decided that it is necessary that there must be the presence of all essentials required for a partnership, although sharing of profits is an important criterion but it is not conclusive. The true test of determining the existence of partnership is mutual agency. If one partner can bind the other partners and the firm by his actions and is also, in turn, bound by the actions of the other partners, only then it can be said that a partnership exists.
Section 4 says that a business must be carried on by all or by any of them acting for all i.e., there should be a mutual agency in a partnership firm. Every partner can bind the other partners for his own act done on behalf of firm. For example – ‘A’ and ‘B’ are in partnership. If A enter into a contract on behalf of the firm then, B gets bound for the same. Similarly if B enters into a contract on behalf of firm then A gets bound for the same. Here, both A and B act as principal and agent to each other. Therefore, every partner occupies a dual relation i.e., principal – agent relationship.
Experience of the firm – A firm is merely an association of people, therefore the experience of the partners is the experience of the firm.
Duration of Partnership
On the basis of duration, a partnership are of different kinds :
- Fixed Partnership – In this partnership, partners are free to decide the period (fixed period) for the existence of partnership. For example – a duration of a partnership firm can be for 2 years or for 5 year.
- Particular Partnership – In this kind, a partnership will exist till the completion of a particular adventure or undertaking. For Example – making a film.
- On happening of an event – In this partnership, there is an agreement which states that on happening of a certain event, the partnership will come into an end. For example – If business runs into loss continuously for 5 year, then that partnership will come into an end
- Partnership at will – In this partnership, when the duration and determination of a partnership is not decided by any of the partner, then such partnership is known as Partnership at will. If either duration or determination or both is decided by the partner then such partnership is not Partnership at will. Even Section 7 deals with the same.
Author: Navya Agarwal,
College - GGSIPU; 2nd year