## **Learning Outcomes**

This article explains partnership decision-making and authority in general partnerships, including:

- How partners make decisions and the distinction between unanimous consent and majority decisions under the Partnership Act 1890
- The difference between actual and apparent (ostensible) authority, and how each affects whether the firm is bound by a partner’s acts
- The impact of internal limits on authority and the role and effect of partnership agreements compared with default statutory rules
- When the partnership and individual partners are liable to third parties for contracts, debts, and wrongful acts under ss.9–12 PA 1890
- The protection and potential liabilities of outgoing and incoming partners, including retirement notices under s.36 and holding out under s.14 PA 1890
- When a partner who binds the firm without actual authority must indemnify co-partners, and when a partner is personally liable for breach of warranty of authority

## **SQE2 Syllabus**

For SQE2, you are required to understand partnership decision-making and authority, the circumstances in which partners bind the firm, and how liabilities and protections operate under the Partnership Act 1890, with a focus on the following syllabus points:

- the difference between actual authority and apparent (ostensible) authority of partners
- when a partnership is liable for contracts and torts entered or committed by its partners
- the impact of partnership agreements versus default Partnership Act 1890 rules
- the requirements for holding out liability and protection for outgoing partners

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. In the absence of a written partnership agreement, which of the following need unanimous consent from all partners?  
   a) entering a new business line  
   b) routine purchase of trading stock  
   c) appointment of a new partner  
   d) day-to-day management decisions

2. A partner contracts with a supplier for a service that is outside the usual business of the partnership. When, if ever, will the firm be bound?  
   a) If the partner has actual authority only  
   b) If the partner has apparent authority and the third party did not know about any limitation  
   c) Always  
   d) Never

3. True or false? If a partner acting without authority binds the partnership, only that partner is liable to the third party.

4. What is the test for apparent (ostensible) authority of a partner?

## **Introduction**

This article explains how decisions are made in an ordinary partnership, how partners can bind the partnership, and the liability consequences of those actions. For SQE2, you must confidently apply the law of agency to the context of partnerships, distinguishing between different types of authority and knowing the scope of the rules which protect partners, clients, and third parties. Under s.5 Partnership Act 1890 (“PA 1890”), each partner is an agent of the firm and of the other partners for the purposes of the business of the partnership. Whether the firm is bound turns on actual and apparent authority, and on what a third party knew or reasonably should have known about the partner’s authority.

### Partnership Agreements and the Statutory Framework

Partners may set out their own rules for decision-making in a partnership agreement. In the absence of such agreement, the Partnership Act 1890 provides default rules. Certain decisions always require unanimous consent (e.g., admission of a new partner, change in nature of business, changing the partnership agreement), while most day-to-day management can be decided by majority.

The default rules most often tested include:

- equal shares of income profits and equal contributions to losses unless otherwise agreed (s.24(1) PA 1890)
- every partner may take part in management (s.24(5))
- no partner is entitled to remuneration for acting in the partnership (s.24(6))
- no new partner may be introduced without unanimous consent (s.24(7))
- no power of expulsion unless expressly agreed (s.25)
- any variation of the partnership terms requires unanimous consent (s.19)

Partners should also anticipate practical matters in their agreement, such as capital accounts, interest on partner loans (often 5% under s.24(3) unless varied), record-keeping and inspection rights (s.24(9)), internal spending limits, and decision thresholds for major commitments (e.g., borrowing, asset purchases, guarantees). Where internal limits are agreed, remember they do not automatically bind third parties unless the third party knows about them, or the circumstances put the third party on inquiry.

> **Key Term: partnership agreement**  
> A contract (written or oral) between partners, setting out rules for managing the business, sharing profits/losses, and authority.

### Authority of Partners

#### Actual Authority

Each partner is an agent of the firm and of the other partners for partnership business. A partner has **actual authority** to bind the partnership if expressly given by the partnership agreement, or implied by the partners’ conduct or established custom.

Actual authority can be:

- express (e.g., specific powers conferred by the agreement or a unanimous/majority resolution)
- implied from role (e.g., purchasing trading stock by a managing partner), from custom (usual in that trade), or from a course of dealing acquiesced in by co-partners

Internal limits (e.g., “any purchase over £5,000 requires consent of all partners”) are effective between partners. They only affect third parties where the third party knows of the limit, or the circumstances were such that the third party could not reasonably assume the partner had authority.

> **Key Term: actual authority**  
> The right conferred on a partner by the partnership agreement, or by implication from the conduct of the partners, to act on behalf of the firm.

#### Apparent (Ostensible) Authority

Even if a partner lacks actual authority, the firm may still be bound if the act was within their **apparent authority** and the third party had no notice of limits. Apparent authority relies on whether a partner would normally be expected to do the act in a business of that nature (the “usual course of business” test).

A practical test used in exams is:

- Is the transaction related to the partnership’s business?
- Would a partner usually be expected to have authority to enter into that transaction for a firm of that kind?
- Did the third party know the partner had no actual authority?
- Did the third party know or suspect the person was not a partner?

If the answers indicate a reasonable belief on the part of the third party that the partner had authority in the ordinary course of the firm’s business, the firm will be bound by the contract despite internal limits.

> **Key Term: apparent authority**  
> The power for a partner to bind the firm if a third party reasonably believes the partner acts for the firm in the ordinary course of its business, and lacks notice that the partner lacks authority.

### **Worked Example 1.1**

Edwina and Rick are partners in an antiques shop partnership. Rick, without consulting Edwina, agrees to purchase a collection of stamps for resale in the shop. Edwina objects, claiming Rick had no authority to buy stamps. Is the partnership bound to complete the purchase?

> **Answer:** Yes. Even if Rick lacked actual authority, purchasing stock is an act done in the usual course of business for an antiques shop. Unless the seller knew Rick lacked authority, the purchase is within Rick’s apparent authority. The partnership is therefore bound by the contract.

### Partner Liability for Debts

Each partner is jointly liable for the firm’s obligations and debts incurred while a partner, including those arising from contracts entered with actual or apparent authority (s.9 PA 1890). Partners may also be held liable for wrongful acts (torts) committed by any partner in the ordinary course of business or with authority (ss.10–12 PA 1890). The effect of ss.10–12 is that liability for torts and the misapplication of property is joint and several; a claimant can sue one, some, or all partners and recover the full loss from any defendant partner(s), leaving those partners to pursue contribution from co-partners.

Partners should be aware that although professional indemnity insurance often covers civil liability in many trades, insurance does not alter the legal position that partners are personally liable for partnership debts and liabilities incurred while they are partners.

> **Key Term: joint and several liability**  
> Partners are both collectively (jointly) and individually (severally) liable for debts of the firm and for wrongful acts of other partners in the course of business during their period as partner.

### Protection for Outgoing and Incoming Partners

An incoming partner is liable only for obligations incurred after joining the firm, unless they agree otherwise (s.17(1) PA 1890). An outgoing partner remains liable for debts and wrongful acts incurred before departure (s.17(2)), unless released by creditors and co-partners (e.g., by novation or a deed of release) under s.17(3). For future debts, a retiring partner escapes liability only if proper notice of retirement is given (s.36 PA 1890). This includes:

- actual notice to persons who have dealt with the firm before (e.g., key suppliers/clients), and
- public notice (often by advertisement in the London Gazette) to notify persons who have not previously dealt with the firm

If retirement is not effectively notified, a retiring partner may be liable by “holding out” under s.14 PA 1890 if third parties reasonably relied on a representation that the person continued to be a partner.

Novation and indemnities:

- a novation releases the retiring partner for existing debts by substituting the newly constituted firm as debtor to the creditor (rare unless valuable consideration or other creditor benefit exists)
- an indemnity from co-partners does not bind third-party creditors; it simply allows reimbursement from co-partners if the retired partner remains liable and pays

> **Key Term: holding out**  
> When a person represents themselves, or allows themselves to be represented, as a partner, they can be treated as a partner and become liable to third parties who relied on that representation.

### **Worked Example 1.2**

Susan retires as partner from Apex Design LLP. She does not notify existing clients or place an advert in a national publication. New contracts are entered after her retirement, using old stationery listing her as a partner. Is Susan liable?

> **Answer:** Likely yes. Because actual notice was not given to known clients, and public notice was not given for new clients, Susan may be treated as still being a partner. She can be liable for contracts formed after retirement by operation of “holding out”.

Important note on entity form: the above holding out principle derives from s.14 PA 1890 and is tailored to general partnerships. LLPs have separate legal personality (Limited Liability Partnerships Act 2000), and members are not generally personally liable for LLP contracts. In exam scenarios, always confirm the business medium. If this were a traditional (general) partnership, the holding out analysis would apply as above. If it is an LLP, personal liability of a former member would not ordinarily arise, though the LLP itself would be bound.

### **Worked Example 1.3**

Lee, a partner in a bakery, contracts to buy video games for resale, which is outside the usual course of a bakery’s trade. The supplier had reason to think Lee was not acting for the bakery. Is the bakery bound?

> **Answer:** No. Buying video games is not in the ordinary course of a bakery’s business, and the supplier knew or ought to have known Lee was not authorised. Only Lee is liable to the supplier.

### Limiting Partnership Liability

If a partner acts outside both their actual and apparent authority (and the third party is, or ought to be, aware of the lack of authority), the firm is not bound, and the partner alone is personally liable to the third party for breach of a warranty of authority. This is an agency principle: a person who represents they have authority and induces a third party to contract can be liable for losses if that representation is false and the firm is not bound.

> **Key Term: breach of warranty of authority**  
> Personal liability incurred by an agent (here, a partner) to a third party where the agent represents they have authority to bind the principal (the firm) but lacks such authority and the firm is not bound.

### **Worked Example 1.4**

Hannah and Omar are partners in a small design studio. Without telling Omar, Hannah signs a contract purporting to sell the firm’s van to her friend at a steep discount, despite an internal rule requiring unanimous approval for any asset sale. The buyer knows Hannah is a partner but learns, before completion, that the firm’s rule prohibits unilateral asset sales. The firm refuses to complete. Can the buyer recover from Hannah?

> **Answer:** The buyer cannot enforce the contract against the firm because the buyer had notice that Hannah lacked authority, defeating apparent authority. The buyer can claim against Hannah for breach of warranty of authority for losses caused by relying on Hannah’s unauthorised representation.

### **Exam Warning**

> If you face a scenario where a partner has acted outside the scope of the usual business and without authority, check carefully whether a third party could reasonably attribute their act to the partnership. If a third party knew or ought to have known of limits (e.g., via suspicious circumstances, unusual transactions for that type of business, or express disclosure), apparent authority will likely fail. Always separate third-party enforceability (firm bound or not) from internal consequences (partner indemnity to co-partners).

### Relationship of Partners to Each Other

Partners owe each other duties of honesty, good faith, and disclosure. Statutory fiduciary duties include:

- duty to provide true accounts and full information (s.28 PA 1890)
- duty to account for profits derived from the position as partner (s.29)
- duty not to compete with the firm without consent (s.30); if a partner does, profits must be accounted to the firm

Many practical difficulties stem from partners exceeding, or acting inconsistently with, agreed internal limits. A partner who binds the firm but acts outside actual authority may be required to indemnify the firm/partners for any resulting loss (s.24(2) indemnity principle). Other default internal rules include no remuneration for acting in the firm (s.24(6)), and equal shares unless varied (s.24(1)). Internal remedies—e.g., repayment, indemnity, suspension from management, or expulsion—depend on the agreement. Without an express power of expulsion (s.25), no partner can be expelled by majority.

Post-dissolution authority continues only so far as necessary to wind up the firm’s affairs and complete unfinished transactions (s.38). Dissolution may occur by notice in a partnership at will (s.26), by expiry of a fixed term (s.32), or automatically upon death or bankruptcy of a partner (s.33), unless otherwise agreed.

### **Worked Example 1.5**

Dana and Conchita are partners in a performance agency. Dana takes a solo booking using the agency’s brand and keeps the fee. What must Dana do?

> **Answer:** Dana must account to the firm for profits derived from her position (s.29) and, if performing in competition with the agency without consent, must account for profits of the competing venture (s.30). Internally, she may also face indemnity obligations for any loss caused and disciplinary action if the agreement permits.

### **Revision Tip**

> When revising, focus on distinguishing between what binds the partnership (apparent/actual authority) and what creates private disputes between partners only. For third-party liability: ask “Was this in the usual course of the firm’s business?” and “Did the third party know of any limits?” For internal consequences: ask “Was there actual authority?” and if not, consider indemnity, accounting for profits, and any agreed disciplinary powers.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Actual and apparent authority are the main bases for partnership decision-making power
- Acts in the usual course of business will bind the partnership unless the third party knew of any limits on authority
- Partners are jointly liable for contracts and jointly and severally liable for torts and misapplication entered into or committed by any partner within authority or usual business (ss.9–12 PA 1890)
- A partnership agreement can alter or exclude certain statutory rules, but specific acts (e.g., admitting new partners, changing the nature of the business, varying the agreement) still require unanimous consent
- Outgoing partners can remain liable unless proper notice of departure is given (s.36) and should avoid being held out (s.14)
- Breach of warranty of authority creates personal liability for a partner when the firm is not bound
- Internal fiduciary duties require accounting for profits, disclosure, and non-competition, with indemnity obligations if partners act outside actual authority
- Post-dissolution authority is limited to winding up, and dissolution triggers affect both decision-making and authority

## **Key Terms and Concepts**

- partnership agreement
- actual authority
- apparent authority
- joint and several liability
- holding out
- breach of warranty of authority

Business organisations and procedures - Partnership decision-making and authority