In practice, you may need to decide whether or not the partnership is bound by a contract which an individual has purported to make on its behalf. In a partnership context, the approach to answering the question of whether or not a firm is bound by a particular contract will differ depending on whether the individual acting on the firm’s behalf is a partner or not. This is because s.5 PA 1890 introduces a special statutory rule of agency which applies only when the agent in question is a partner in the firm. Where the purported agent is not a partner, you apply rules from the common law. We will consider each of the ‘partner’ and ‘non-partner’ approaches separately below.
Partners content with agent’s act (whether partner or non-partner)
In many cases, an individual acting as a firm’s agent (whether a partner or not) will simply have put into effect the wishes of the partnership as a whole. If all the partners are happy for the firm to enter into the contract and have given actual, express or implied authority to bind the firm, then the firm will be bound. In any event, if the partners are happy to be bound, the situation is not problematic even if the agent had no authority at the time the contract was made. The partners are able to ratify the agent’s act and adopt the contract, either expressly or simply by going ahead and performing it.
Partners not content with agent’s act
Either s.5 PA 1890 or the common law rules of agency will determine whether or not the firm is bound, depending upon whether the agent is a partner or not.
Power of a partner to bind the firm against the partners’ wishes: s.5 PA 1890
Section 5 makes provision for the firm to be bound in certain circumstances, even where the other partners are not happy to be bound by the contract made by the agent. Since s.5 is intended to protect the third party to the contract, it is that third party’s view of what is happening that counts.
Following s.5, a partner’s unauthorised act will bind the firm if, viewed objectively:
- the act is for carrying on business of the kind carried on by the firm (for example, “is this the kind of contract that one would expect to be done in the course of business of this kind?”); and
- the act is for carrying on such a business in the usual way (for example, “is this the kind of contract that a partner acting alone would usually make on the firm’s behalf or is it a contract of the kind an outsider would expect all partners in a firm to sign individually?”).
The firm will not be bound, however, if:
- the third party actually knew that the partner in question was not authorised to enter into the contract on behalf of the firm; or
- the third party did not know or believe that the partner was a partner.
A partner who binds his firm without actual authority may be liable to the other partners for breach of contract.
Power of a non-partner to bind the firm against the partners’ wishes: apparent authority at common law
Section 5 does not apply at all if the person entering the contract is not in fact a partner. In that case, the common law rules of agency establish whether or not the firm is bound as principal.
At common law, an agent who has no actual authority may still bind the firm if he has apparent authority to enter into a contract. Apparent (sometimes called ‘ostensible’) authority arises when the principal (here the firm) represents or permits a representation to be made to a third party that a person has authority to bind the firm. For example, if a firm employs somebody under the title ‘marketing manager’, that title confers on that person apparent authority to bind the firm on marketing decisions. Once the principal’s representation has been made to, and relied upon by, the third party, the principal is bound by the actions of that person.
If the representation is that a particular person is a partner (when, in fact, they are not), then the firm is said to be ‘holding out’ that person as a partner. A person who has been held out as a partner has apparent authority to bind the firm in the same way as a real partner can. An example of holding out is in relation to an ex-partner, when the firm carries on using old letterhead (including his or her name) after he or she retires.
Section 5 is always the first place to look when deciding whether or not an act of a partner binds a firm but does not displace the application of ordinary common law agency entirely. In some circumstances, s.5 alone will not get you to the end of the story. If a partner has purported to form a very unusual kind of contract on behalf of the firm, a s.5 analysis may lead you to conclude that the firm is not bound under statute. However, the particular facts and circumstances of the case may mean that this partner did have his partners’ apparent authority at common law to conclude the contract.