A and B carry on motor repair business in partnership. Under the deed of partnership, A has no power of borrowing money. C a creditor, knowing nothing about restrictions on the power of A for borrowing money, lends A money for the use of the firm. Is the firm liable to C for repayment of the money lent by him to A. Refer to statutory provisions and decided cases.

Implied Authority of a Partner Under Section 19

Section 19(1) of the Indian Partnership Act, 1932 provides that, subject to the provisions of Section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. This implied authority flows directly from Section 18, which declares that a partner is the agent of the firm for the purposes of its business, and it extends to every act that falls within the ordinary and usual conduct of the particular kind of business that the firm carries on, irrespective of any private arrangement the partners may have made between themselves restricting that authority, so long as the third party dealing with the partner had no notice of such restriction. Borrowing money for the ordinary purposes of a business, such as purchasing spare parts, tools, equipment, or materials required for carrying on that business, is not among the acts specifically excluded from implied authority under Section 19(2), and remains within a partner's implied authority wherever borrowing is a usual incident of the business in question.

The Effect of a Private Restriction: Section 20

Section 20 governs precisely the situation presented here. It provides that partners may, by contract between themselves, extend or restrict the implied authority of any partner, but notwithstanding any such restriction, an act done by a partner which falls within his implied authority binds the firm and third parties dealing with the firm unless the person dealing with the partner knows of the restriction, or does not know or believe that partner to be a partner. The effect of this provision is that a private clause in the partnership deed curtailing a partner's authority operates only inter se between the partners themselves, and has no bearing whatsoever on an innocent third party who deals with the firm without notice of that restriction, provided the act in question would otherwise have fallen within the partner's implied authority having regard to the nature of the firm's business.

Application to the Facts

A and B carry on a motor repair business, a business whose ordinary and usual conduct frequently requires the purchase of spare parts, tools, lubricants, and other materials, often necessitating the borrowing of funds to meet these operational requirements, particularly where credit purchases from suppliers or short-term loans are a routine feature of running such a business. Borrowing money for the use of the firm is therefore an act done to carry on, in the usual way, business of the kind carried on by A and B, and falls squarely within A's implied authority under Section 19(1). The clause in the partnership deed depriving A of the power to borrow money is a private restriction agreed upon between A and B, and by virtue of Section 20, this restriction does not affect C, who is stated to have known nothing about it and to have lent the money to A in good faith for the use of the firm, believing him to be a partner possessing the usual authority that partners in such a business ordinarily have. Consequently, the firm remains bound to repay C, since as far as C, an innocent third party without notice, is concerned, A's borrowing was within his apparent and implied authority as a partner, notwithstanding that it constituted a breach of the private agreement between A and B; A alone would be answerable to B internally for having exceeded that agreed limitation, but the firm's liability to C is unaffected.

Illustration

Suppose A and B run a motor repair garage, and A borrows Rs. 30,000 from C to purchase a consignment of spare parts and repair tools urgently needed for the firm's ongoing work, notwithstanding a clause in the partnership deed depriving A of any power to borrow on the firm's behalf. C, having dealt with the firm previously and having no knowledge of this internal restriction, lends the money believing A to be a partner with the ordinary authority that a partner in a motor repair business would possess. The firm, consisting of A and B, is liable to repay C the full amount, since A's borrowing fell within his implied authority under Section 19(1), being an act done to carry on the firm's business in the usual way, and the restriction contained in the deed does not bind C under Section 20 in the absence of notice to him. If, however, C had actually known of the restriction on A's borrowing power at the time he advanced the loan, the position would be reversed, and the firm would not be liable to him, since Section 20 withdraws its protection from a third party who deals with a partner with actual knowledge of the very restriction that curtails his authority.

Conclusion

The firm of A and B is liable to C for repayment of the money lent by him to A. Borrowing money was within A's implied authority under Section 19(1), being an act usual and necessary for carrying on a motor repair business, and the private restriction on that authority contained in the partnership deed cannot defeat C's claim under Section 20, since C had no notice of the restriction and lent the money in good faith for the use of the firm. A's breach of the internal agreement with B renders him answerable to B alone, but does not relieve the firm of its liability to an innocent creditor such as C.