Partners Rights and Duties Inter Se: An Examination of the Fiduciary Relationship in Partnership Law

This article is written by Ashna Kamuni of 4^th Semester of B.A., LL.B. of NALSAR University of Law, an intern under Legal Vidhiya

Abstract

Partnerships are established on the foundation of mutual trust and reliance, and their legal framework is governed by a complex set of principles known as partnership law. At the core of partnership law is the concept of fiduciary duty, which imposes a series of obligations on each partner to act in the best interests of the partnership and its other members.

The present research paper delves into the intricacies of partners’ rights and duties inter se, and examines how these fiduciary obligations manifest in various aspects of the partnership relationship. It explores the duties of partners to act in good faith, to contribute their skills and efforts to the partnership, to refrain from self-dealing, and to maintain confidentiality. Additionally, the paper analyses the rights of partners, including their entitlement to share in profits and losses, to access partnership information, and to participate in decision-making. Through a comprehensive analysis of case law, statutory provisions, and scholarly commentary, the paper sheds light on the delicate balance between partners’ individual interests and the collective well-being of the partnership. It highlights the importance of upholding fiduciary duties in fostering trust, collaboration, and success within partnerships. Overall, this research paper contributes to the understanding of partnership law and provides valuable insights for practitioners, academics, and policymakers alike.

Keywords

Fiduciary Duty, Rights, Good Faith, Contribution, Confidentiality, Indian Partnership Act, Regulatory Mechanisms

Introduction

The Indian Partnership Act of 1932 provides a comprehensive framework for the regulation of partnerships in India. It offers partners the flexibility to delineate their respective roles, responsibilities, and duties through a partnership deed. If such a deed is not present, the provisions outlined in the Indian Partnership Act become applicable. However, despite the autonomy enjoyed by partners to craft a partnership agreement specifying their rights and obligations, certain rights and duties mandated by the Indian Partnership Act, 1932, remain unalterable by any contrary agreement (Section 11). As all partners function as agents within the partnership, a fundamental principle is the obligation to act in good faith toward one another. Notably, any contractual agreement that binds one partner is binding on all other partners as well (Section 9, Indian Partnership Act, 1932).

This legal framework establishes a baseline of expectations and obligations among partners, fostering a cooperative and transparent environment within the partnership. It underscores the importance of mutual trust and adherence to collective agreements for the smooth functioning of the partnership firm. The phrase “Partners inter se” is employed to distinguish the distinct rights and duties that exist among multiple parties from their obligations to external entities. [1]This concept asserts that each partner functions as an agent for every other partner, resulting in the collective binding of all partners by a contract entered into by any individual partner. Consequently, the relational dynamics among partners are grounded in a foundation of mutual trust and confidence. In essence, the Indian Partnership Act of 1932 unfolds as a dynamic legal tapestry, weaving together autonomy and regulation, trust and obligation, to delineate a framework that encapsulates the diverse and evolving nature of partnerships in the commercial landscape.

Understanding Partnership- What are Partnerships?

Partnership is a unique and specialized form of contractual agreement, as defined by Section 4 of the Indian Partnership Act of 1932. It represents the relationship established among individuals who consent to share the profits generated from a collective business endeavour, where each partner may act on behalf of the entire group. These individuals, who are referred to as “partners,” form a “firm” collectively, and the name under which their joint business activities are conducted is called the “firm name.” In essence, the intricacies of partnership extend beyond a mere contractual relationship, encompassing the dynamic interplay of shared profits, mutual consent, and the autonomy of partners in defining the terms of their collaboration. The legal underpinnings provide a robust framework that not only facilitates the smooth functioning of partnerships but also safeguards the individual rights and professional pursuits of the involved parties. There are several types of partnerships, each with its own set of characteristics and legal implications. These include general partnerships, limited partnerships, and limited liability partnerships. In summary, partnership is an essential aspect of business, providing entrepreneurs with a flexible and efficient way to collaborate and achieve their goals while protecting their individual rights and interests. Partnerships can be classified into many types, few of them are:

1. General Partnership (GP): All partners share ownership and liability.
2. Limited Partnership (LP): Two types of partners – general partners (unlimited liability) and limited partners (limited liability).
3. Limited Liability Partnership (LLP): All partners have limited liability and tax advantages.
4. Limited Liability Limited Partnership (LLLP): Limited partners have limited liability even when managing.
5. Joint Venture: Companies collaborate on a specific project, sharing resources and risk.
6. Strategic Alliance: Non-equity partnership for technology, expertise, or market access.
7. Franchise: One company grants another the right to use its brand and business model.

Partnerships can be classified into two main categories based on their duration too:

1. Partnership at Will: This type of partnership has no predetermined end date. It continues to exist until one or more partners decide to dissolve it or until a specific event occurs, such as the death or bankruptcy of a partner.
2. Partnership for a Fixed Duration: In contrast, a partnership for a fixed duration has a predetermined end date. This date is typically specified in a partnership agreement. Once the end date arrives, the partnership automatically dissolves.

Partnerships can also be classified into two main categories based on the extent of the business they carry on:

1. General Partnership: In a general partnership, the partners are engaged in all aspects of the partnership’s business. This means that they are responsible for managing the business, making decisions, and carrying out the day-to-day operations.
2. Particular Partnership: A particular partnership, also known as a special partnership, is one in which the partners are only authorized to carry on a specific business or activity. This means that they cannot engage in any other business activities without the consent of all the partners.

Partnerships offer several advantages, including ease of formation, pooling of resources and expertise, and flexibility in decision-making.

Unveiling the Rights and Duties of Partners

Duties of a Partner

1. Duty to Act in Good Faith: Partners are bound by an ethical duty to act in good faith for the collective benefit of the partnership. Their focus should be on maximizing profits for the company rather than seeking personal gains. The prohibition of receiving secret profits is integral to this duty.[2] Partners are obligated to provide accurate accounts and comprehensive information on all matters affecting the company to fellow partners or their legal representatives. This duty persists even after the partnership ceases, extending to the obligations to ex-partners and their legal representatives.

Illustrative Case – In the case of Bentley v. Craven,[3] a partner in a sugar refining company made a profit by selling sugar from his personal stock without disclosure. The court ruled that partners cannot accrue secret profits, affirming the company’s entitlement to recover such gains.

2. Duty to Render True Accounts: Partners must adhere to the duty of transparency by disclosing and providing complete information about all aspects affecting the organization to fellow partners or their legal representatives. This obligation extends to sharing any additional information, and any agreement with co-partners necessitates full disclosure to avoid rendering the contract voidable.[4]

Duty to Indemnify for Fraud: Partners are bound by the duty to indemnify the partnership for losses incurred due to fraudulent actions. This duty ensures honest and fair dealings with customers. It’s crucial to note that this duty remains absolute and cannot be circumvented by contractual agreements. For instance, a partner committing fraud must compensate the company for resulting damages.

Illustration – In a hypothetical scenario where Partner A commits fraud, causing a loss of Rs.1 Lakh, all co-partners, including B, C, and D, share responsibility. Here, Partner A is obligated to compensate the company for the damages resulting from the fraud.

3. Duty Not to Compete: Partners are prohibited from personally profiting by engaging in equivalent or competing business ventures. Any profits derived from such activities must be accounted for. While this duty can be altered through a partnership agreement, violations may lead to termination of the partnership.

Precedent – In Pullin Bihari Roy v. Mahendra Chandra Ghosal,[5] a partner in a salt trading partnership made a personal profit by selling salt separately. The partner was held accountable to fellow partners for the profits earned.

4. Duty to be Diligent: Partners are required to execute their duties with diligence. While honest errors or acts in good faith are not grounds for liability, negligence causing harm to the firm may result in compensation claims.

Legal Instance – In Cragg v. Ford,[6] a managing director’s decision to delay the sale of cotton resulted in reduced profits. The court clarified that actions for compensation can only be brought on behalf of the company or partners, emphasizing that personal claims by partners are not permissible.

5. Duty to Properly Use the Property of the Firm: Partners must ensure that the firm’s property is utilized exclusively for business purposes.

Example – If a partner uses company property for personal gain, causing harm, they become liable to fellow co-partners for the resulting damages.

6. Duty to Account for Personal Profits: Partners must account for any personal profits derived from the use of company property. This duty is grounded in the fiduciary relationship between partners.

Scenario – Accounting for Personal Profits: In situations where a partner receives extra commission to patronize their personal business, they are obligated to account for these profits to their co-partners.

Rights of a Partner

1. Conduct of Business: All partners possess the inherent right to participate in the conduct of business within the partnership. This shared managerial power ensures collaborative decision-making. However, specific terms in partnership agreements may allocate limited management authority to certain partners, a situation where courts are cautious about intervention unless evidence of illegal activities or breach of trust surfaces.

Legal Insight – In Suresh Kumar Sanghi v. Amit Kumar Sanghi,[7] a partner’s attempt to undermine the managing partner’s position led to a court injunction, emphasizing the protection of the company’s business interests.

2. Right to be Consulted: Differences among partners regarding business matters are resolved by majority views. However, decisions altering the very nature of the partnership require unanimous consent. This right ensures that major decisions are not made without the agreement of all partners.

Illustrative Scenario – Unanimous Consent Requirement: For instance, if the inclusion of a minor as a beneficiary is under consideration, unanimous consent of all partners becomes a prerequisite.

3. Right of Access to Books: Every partner, whether active or dormant, has an unequivocal right to access and examine the books of the partnership. This right, however, should be exercised in good faith.

Example – Bonafide Exercise of Right: If a dormant partner wishes to sell shares and employs an expert to scrutinize accounts, objections by other partners must be based on legitimate grounds such as trade protection.

4. Right to Remuneration: Partners are not entitled to additional pay beyond their share of profits.

Case Laws

In the case of Cox v. Hickman,[8] the creation of a trust by creditors was established when two individuals were engaged in a business and were unable to discharge their financial liabilities. Hickman, who was involved in the matter, did not have a significant role in the business. The court determined that the ultimate test to determine whether an individual is part of a partnership or not is the “Relationship of mutual agency.”

Similarly, in Rhodes v. Moulse,[9] a case involving a partnership of solicitors, one of the partners stated that creditors had requested additional security. The court held that this constituted misappropriation, and the firm was held liable.

In Kirckwood v. Cheetham & Smith,[10] the doctrine of holding out in retirement cases was discussed. The judgment determined that if a third party does not know whether an individual has retired or not, then they can elect to sue either the old or newly constituted firm.

Regarding the conduct of partners, the court held that a partner should be honest, and the foundation of a partnership is built on trust and honesty. In one case, where a partner was found without a ticket on a train, the court held that honesty is essential for partners. However, in a different case where one of the partners was involved in adultery, the court opined that such actions do not make the customer’s money less safe and are personal to the partner. It’s a matter involving different opinions and judgements.

Conclusion

The relationship between partners is a complex one that is governed by a set of rights and duties. These rights and duties are designed to protect the interests of the partners and the partnership, and to ensure that the partnership operates in a fair and transparent manner. The Indian Partnership Act, 1932 provides a comprehensive framework for regulating partnerships, covering aspects such as formation, registration, dissolution, and dispute resolution. The Act also outlines the fundamental rights and duties of partners, which cannot be altered or overridden by any agreement between the partners. Partners have a right to participate in the running of the business, to express their opinions, to access books and accounts, and to share in the profits of the business. They also have a duty to act in good faith, to work diligently, to use the firm’s assets properly, to earn or compete for personal gains, and to render true accounts. The rights and duties of partners are essential for maintaining a harmonious and successful partnership. By adhering to these principles, partners can foster a trusting and collaborative environment that promotes the success of the partnership.

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[1] The Partnership as a legal Entity, 41, COLUMBIA LAW REVIEW, 698-707 (1941).

[2] Adam Barone, What Is a Fiduciary Duty? Examples and Types Explained, INVESTOPEDIA

(Nov. 17, 2023, 8:19 PM), https://www.investopedia.com/ask/answers/042915/what-are-some-examples-fiduciary-duty.asp.

[3] Bentley v. Craven [1853] 18 Beav 75.

[4] Sharmin Godrej Irani, Validity of a contract, voidable contract and void agreement as given under Indian Contract Act, 1872, SCC BLOG (Jan. 30, 2021), https://www.scconline.com/blog/post/2021/01/30/validity-of-a-contract-voidable-contract-and-void-agreement-as-given-under-indian-contract-act-1872/.

[5] 67 Ind Cas 10.

[6] Crag v. Ford [1842] 1 Y C 280.

[7] Suresh Kumar Sanghi and ors v. Amit Kumar Sanghi & Sons, 1983 (4) DRJ 186.

[8] Cox v. Hickman (1860) 8 HLC 268.

[9] Rhodes V. Moules (1895) 1 CH. 236 (CA).

[10] Kirkwood v. Smith, 72 App. Div. 429.

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