Partnership Decision-Making and Authority
A partnership has no separate legal personality of its own, and yet it borrows money, buys stock, signs leases, and gets sued — all through the hands of individual partners acting on its behalf. The mechanism that makes this possible, and that also limits it, is agency: every partner is, in law, an agent of the firm and of every other partner. Understanding exactly where that agency starts and stops is the single most tested skill in this topic, because it is the question a client always asks after the damage is done: "my partner did something reckless — am I on the hook for it?"
Section 5 of the Partnership Act 1890 supplies the default answer. It provides that every partner is an agent of the firm and of the other partners for the purposes of the partnership business, and that an act done by a partner for carrying on in the usual way business of the kind carried on by the firm binds the firm and the other partners. Notice what section 5 does not require: it does not require that the acting partner actually had permission. It is enough that the act looks, to the outside world, like the ordinary business of that kind of firm.
Section 5 does carve out two escape routes for the firm, but both depend on what the third party knew:
A partner's act does not bind the firm if that partner had no actual authority to act in the particular matter, and either (a) the third party knew of that lack of authority, or (b) the third party neither knew nor believed the person to be a partner.
So the firm is protected only when the outsider was, in some sense, not an innocent counterparty. If the outsider reasonably believed they were dealing with a partner acting in the ordinary course of the firm's business, the firm is bound — full stop, regardless of what the partnership agreement says internally.
Everything therefore turns on one question: was the act "of the kind carried on by the firm"? This is a factual inquiry into what the firm actually does, not what a rulebook says it is permitted to do. Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 shows how far this can stretch. A garage partnership's own agreement expressly excluded buying and selling cars from the partnership business — the partners had agreed between themselves never to trade in vehicles. One partner ignored that internal restriction and sold a car he had no title to, to a finance company. The other partner, a sleeping partner who had done nothing wrong and knew nothing of the transaction, was still held liable. Why? Because to an outsider, a garage selling a car looks exactly like the usual course of a garage's business. The internal restriction in the partnership agreement was invisible to the finance company, so it could not shield the firm.
That case captures a broader principle worth holding onto: apparent (usual) authority under section 5 can bind a firm even where the partnership agreement expressly restricts that partner's actual authority, so long as the third party has no notice of the restriction. Private arrangements between partners manage risk between themselves; they do not, on their own, manage risk to the outside world.
One recurring application of "usual authority" concerns borrowing. Trading partnerships — firms whose business depends on buying and selling goods — carry an implied authority for any partner to borrow money on the firm's credit for business purposes. A partner in a wholesaler or a shop can walk into a bank and raise a loan in the firm's name, and that will usually bind the firm, because raising working capital to buy and sell stock is exactly what a trading business does in the ordinary course.
That implied authority is narrower than it looks, though, because it depends entirely on the firm being a trading firm in the first place. Higgins v Beauchamp [1914] 3 KB 1192 is the counter-example every student should know: a firm running cinematograph theatres was held not to be a trading partnership, because its business was providing entertainment, not buying and selling goods. A partner who borrowed money in the firm's name therefore had no implied authority to do so, and the firm was not bound. The same logic protects non-trading partnerships generally — most obviously a firm of solicitors. A solicitors' practice sells advice and services, not goods, so a partner does not automatically have implied authority to borrow on the firm's behalf. If your client is a professional partnership and a rogue partner has taken out a loan in the firm's name, the trading/non-trading distinction is often the first line of defence.
Where section 5 covers the informal, everyday exercise of usual authority, section 6 deals with formally executed documents. It provides that an act or instrument relating to firm business, done or executed in the firm name — or in any manner showing an intention to bind the firm — by a person so authorised, binds the firm and all the partners. This is really just section 5's logic applied to signed instruments rather than casual acts: authorisation (actual or apparent) is still the key. Section 6 is also careful to preserve the general law: it does not affect any general rule of law relating to the execution of deeds or negotiable instruments, so the ordinary formalities for deeds (a written document, signed, witnessed, and delivered) and for bills of exchange or cheques still apply on top of partnership law.
Section 5's protection for firms narrows sharply once a partner's act has nothing to do with the firm's business at all. Section 7 addresses exactly this scenario: a partner pledging the credit of the firm for a purpose apparently unconnected with the firm's ordinary business — think of a partner using the firm's name to fund a personal gambling debt or an unrelated side venture. Here the firm is not bound unless that partner is in fact specially authorised by the other partners. The contrast with section 5 is instructive: under section 5, apparent authority alone is enough because the act looks like ordinary firm business; under section 7, because the act does not even look connected to firm business, only genuine, specific authorisation will do.
Partners are, of course, free to manage risk between themselves. Section 8 allows partners to agree between themselves to restrict any one or more partners' power to bind the firm — for example, requiring two signatures on any contract above a certain value. But section 8 immediately shows its limits: an act done in contravention of an agreed restriction is not binding on the firm only as against a person who has notice of that restriction. A third party who has no notice of the restriction can still hold the firm bound, provided the act fell within the partner's usual authority. This is the same theme running through sections 5, 6, and 8: internal restrictions bind outsiders only when outsiders know about them. Put the client's restriction in writing and communicated to the counterparty — a notice on headed paper is not the same as a whisper between partners.
Once the firm is bound, section 9 fixes personal exposure: every partner is liable jointly with the other partners for all the debts and obligations of the firm incurred while that person is a partner. This is why partnership is often described as carrying unlimited, shared personal liability — a creditor can pursue the partners' personal assets for firm debts.
Liability can also arise for people who are not, strictly, partners at all. Section 14 provides that a person who represents themselves, or knowingly allows themselves to be represented, as a partner in a firm is liable as a partner to anyone who gave credit to the firm in reliance on that representation. This is commonly called liability by "holding out." A retired partner whose name remains on the firm's letterhead, or a consultant introduced to clients as "our partner," can find themselves personally liable to a creditor who extended credit believing that representation — even though no partnership in fact exists between them and the firm.
The default rules set out in the Act are not fixed in stone. Section 19 allows the mutual rights and duties of partners — whether fixed by agreement or by the Act itself — to be varied by the consent of all the partners. Crucially, that consent need not be a formal amendment: it may be express, or it may be inferred from a course of dealing. If partners have, in practice, been operating on different terms from their written agreement for years without objection, a tribunal may treat that conduct itself as the partners' consent to vary their arrangement.
Where the partners have not addressed a question expressly (or by necessary implication), section 24 supplies a set of default rules on partners' interests, rights, and duties. The framing matters: these rules apply subject to any agreement, express or implied, between the partners — they are a fallback, not a mandatory code.
| Rule | Default position |
|---|---|
| Rule 1 | All partners share equally in capital and profits, and must contribute equally towards losses |
| Rule 2 | The firm must indemnify a partner for payments made and liabilities incurred in the ordinary and proper conduct of the business |
| Rule 5 | Every partner may take part in the management of the partnership business |
| Rule 6 | No partner is entitled to remuneration for acting in the partnership business |
| Rule 7 | No person may be introduced as a new partner without the consent of all existing partners |
| Rule 8 | Ordinary matters may be decided by a majority; but no change to the nature of the business without unanimous consent |
| Rule 9 | Partnership books are kept at the firm's place of business (or its principal place, if there is more than one), and every partner may inspect and copy them whenever they think fit |
Two features of Rule 8 deserve separate attention because they are easy to conflate: day-to-day disputes about running the existing business only need a majority, but changing what the business fundamentally is needs everyone's agreement. A majority of partners can decide to take on a new supplier; they cannot vote to pivot the firm from conveyancing into commercial litigation over the objection of a single dissenting partner.
Section 25 closes off a tempting shortcut: no majority of partners can expel a partner unless a power to expel has been conferred by express agreement between the partners. There is no default expulsion power lurking in the Act — silence protects the partner, not the majority. This is precisely why formal partnership agreements almost always address expulsion directly if the partners want that option available at all.
Everything in section 24 (and section 25) is a default — it fills gaps, but partners can, and routinely do, draft around it. A partnership agreement can lawfully displace the default rules in section 24 by substituting its own decision-making, remuneration, or profit-sharing provisions, and can lawfully confer a power to expel a partner by majority vote, something the section 25 default does not otherwise permit. In practice, a well-drafted formal partnership agreement tends to reshape governance along several recurring lines:
- Reserved matters requiring unanimity. Formal agreements commonly list fundamental matters — admitting or expelling a partner, amending the agreement itself, or borrowing above a set financial threshold — that require unanimous consent regardless of what a bare majority wants.
- Quorum. A quorum requirement must typically be satisfied before a partners' meeting can validly transact business at all, protecting minority partners from decisions taken behind their backs.
- Weighted voting. Rather than one-partner-one-vote, agreements commonly weight voting power according to profit share or capital contribution, so that a partner with a larger stake carries proportionately more influence.
- Delegated management. Agreements commonly appoint a managing or senior partner with day-to-day decision-making authority, subject to matters reserved for the full partnership — a practical necessity once a firm grows beyond the point where every decision can go to a full partner vote.
- Profit-sharing displaced. The default equal-shares rule in Rule 1 is commonly displaced by fixing profit shares according to seniority, capital contribution, or performance.
- Remuneration displaced. The default no-remuneration rule in Rule 6 is commonly displaced by paying a fixed salary to a salaried partner, distinct from a full equity partner sharing in profits.
- Restrictive covenants and garden leave. Agreements commonly include restrictive covenants preventing an outgoing partner from competing with the firm or soliciting its clients or staff for a defined period after departure, and a garden leave provision requiring a departing partner to stay away from client contact during a notice period while remaining bound by partnership duties.
- Dispute resolution. Agreements commonly require disputes between partners to go to mediation or arbitration before litigation can be commenced — keeping partner disputes out of open court.
- Continuation on death or departure. Agreements commonly provide that the partnership continues notwithstanding the death, retirement, or expulsion of a partner, displacing the general law's default tendency toward dissolution on such an event.
- Capital versus current accounts. Agreements commonly distinguish a partner's capital account — representing fixed capital contributed — from a current account — representing accumulated, undrawn profit. Keeping these separate matters enormously when a partner leaves and the partnership has to work out exactly what is owed to them.
- Notice periods. Agreements commonly specify a minimum notice period a partner must give before retiring, giving the remaining partners time to plan around the departure.
- Supermajority thresholds. Beyond the reserved-matters list, an agreement can require a higher threshold than a bare majority — a two-thirds vote, for example — for specified categories of decision that fall short of requiring full unanimity but are still considered too important for a simple majority.
Read together, sections 5 to 9 answer the external question — when does a partner's act bind the firm to an outsider? — while sections 19, 24, and 25, together with the drafting practices above, answer the internal question — how do partners govern themselves and each other? A well-prepared SQE1 candidate should be able to move fluidly between the two: spot whether a problem is about a firm's exposure to a third party or a dispute among the partners themselves, then apply the right layer of rules — statutory default, or agreed variation — to reach the answer.