DR.

RAM MANOHAR LOHIA NATIONAL

LAW UNIVERSITY, LUCKNOW.

PROJECT ON CONTRACT LAW

TITLE: MUTUAL AGENCY AS TEST OF PARTNERSHIP

SUBMITTED BY: UNDER THE SUPERVISION OF:

Swarnim Pandey Dr. Visalakshi Vegesena

Enroll no- 160101156 Associate Professor
Section- B (Law)
Sem-3 RMLNLU

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ACKNOWLEGEMENT

I have taken efforts in this project. However, it would not have been possible without the
kind support and help of many individuals. I would like to extend my sincere thanks to all of
them.

I am highly indebted to Dr. Visalakshi Vegesena for her guidance and constant supervision
as well as for providing necessary information regarding the project and also for her support
in completing it.

I would like to express my gratitude towards our parents for their kind co-operation and
encouragement which helped me in completion of this project.

My thanks and appreciations also go to my colleagues in developing the project and people
who have willingly helped me out with their abilities.

-Swarnim Pandey

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OBJECTIVES
The objective of this project is two-fold and falls within the ambit of The Indian Partnership
Act 1932,

 Meaning of mutual agency

 How it is a conclusive test for determining partnership.

The project shall also endeavour to discuss the essentials of partnership briefly along with
citing the authorities and a bit of background as regards to development of mutual agency as
a test for partnership.

RESEARCH METHODOLOGY
The research methodology shall include both primary and secondary sources along with
proven facts and various case laws and judicial precedents.

I took help from various online resources, journals, articles and books on contract law.

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CONTENT

 Introduction

What is partnership?
Essentials of partnership

 Sharing of profits as a test of partnership

 Mutual Agency

 Mutual Agency as Final Test of Partnership

(Wheatcroft and Cox v. Hickman)

 Conclusion

 Bibliography

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INTRODUCTION

One of the forms in which business can be carried is partnership, where two or more persons
join together to form partnership and run the business. In order to govern partnership the
Indian Partnership Act 1932 was enacted. It not only deals with essential ingredients but also
with the rights and duties of partners towards another and also third party and legal
consequences in case of any breach.

Partnership may however be described as branch of law dealing with principal and agent
since every partner is contemplation of law the general and accredited agent and principal of
the partnership.

 WHAT IS PARTNERSHIP?
Partnership is the relation between two persons who have agreed to share the profits of a
business carried on by all or anyone of them acting for all.1

Persons who have entered into partnership with one another are called individually,
"partners" and collectively "a firm", and the name under which their business is carried on is
called the "firm-name".2

 ESSENTIALS OF PARTNERSHIP
It therefore follows from above that partnership contains the following;

1. It must be result of an agreement between two or more persons. It maybe express or

implied from conduct. It maybe oral or in writing.
2. The agreement must be to share the profits of the business. An agreement to share
losses isn’t essential.
3. The business must be carried on by all or any of them acting for all. This is what is
‘Mutual Agency’.

All these conditions must co-exist before a partnership can come into existence.

1
Section 4 of Indian Partnership Act 1932
2
ibid

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SHARING OF PROFITS AS A TEST FOR
PARTNERSHIP

The test that one who shares in the profits is a partner as to third persons , was first
announced in Grace v. Smith3, where it was said: "Every man who has a share of the profits
of a trade ought also to bear his share of the loss. If anyone takes part of the profits, he takes a
part of the fund which the creditor relies upon for payment." In Waugh v. Carver (Waugh
test) 4, was a case involving two ship agents who contracted to refer business to each other
and to split the profits generated by the referrals. Their contract made it clear that they
wouldn’t be liable for the losses. One of the two was sued on a claim of debt arising out of
referral business. the court applied the test laid down in Grace v. Smith, and agreed that while
by their agreement "with respect to each other these persons were not to be considered as
partners, yet they have-made themselves such with regard to their transactions with the rest of
the world." Under these cases it should be noted, that it was a sharing of net profits that
constituted a partnership; sharing gross returns was held not to establish the relation either
between the parties or in respect to third person.5

This test held authority for many years but was later left more or less redundant by the decree
provided in the case of Cox v Hickman, which in turn has found its way in Indian courts.

Thus according to sections of Indian Partnership Act , receiving of profits isn’t a conclusive
test of partnership but not receiving profits is a conclusive test of no partnership. It only is a
prima facie evidence which can be overcome by means of stronger evidence (mutual agency).

Section 66 makes it clear that ‘in determining whether a group of persons is or is not a firm, or
whether a person is or is not a partner in a firm, regard shall be had to the real relation
between the parties, as shown by all relevant facts taken together’.

The Explanations to Section 6 provide a list of people who may be interested in the profits of
a business but do not become partners just because of their interest in the partnership or
business.

Explanation 1 to the Section makes it clear that two or more people who jointly own a
property or have common interest in a particular property do not become partners merely by
sharing the profits or gross returns that arise from such property.

Similarly, Explanation 2 of the Section provides a list of person who they receive a share of
the profits of a business or payments contingent upon the profits earned by a business but are
not partners in a business.

3
2 W. B1. I, 998 (I775)
4
2 H. B1. 235 246 (1793)
5
University of Pennsylvania Law Review and American Law Register, Vol. 61, No. 8 (Jun., 1913), pp. 596-599
6
Section 6 of Indian Partnership Act 1932

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MUTUAL AGENCY

Section 6 of the Indian Partnership Act is based on the principle of mutual agency as laid
down in the leading case of Cox v Hickman (which shall be discussed later in detail), which
says that real relation between parties should show presence of mutual agency for presence of
partnership in turn. Mere sharing of profits isn’t a conclusive test7.

Mutual agency is the legal relationship between partners in a partnership where each partner
has authorization powers and the ability enter the partnership into business contracts. In other
words, each partner in the partnership is an agent in the business and the authority to make
business decisions that commit or bind the partnership, as a whole, to a business agreement
with a third party or entity.8

Each partner herein is the principal for the acts of other partner and is an agent having
binding capacity with regards other partners. Or in other terms, each partner is an agent as
well a principal.

It is mutual agency that distinguishes between co-ownership, partnership and HUF.

MUTUAL AGENCY AS THE FUNDAMENTAL

TEST OF PARTNERSHIP (Cox and Wheatcroft v.
Hickman)

The case of Cox v Hickman9 is known as the watershed case in the history of common law of
partnership. By a close vote in the House of Lords (highest appellate court in England), the
test of partnership moved away from the Waugh test of sharing profits to mutual agency10.

 THE CASE
Benjamin and Josiah Smith were partners under the name of B. Smith and Son, engaged in
the business of iron masters and corn merchants. Being unable to meet their outstanding
obligations, they made an assignment of all their property to creditors, as trustees, upon trust,

7
Business law – P. C Tulsian (sec 16.5)
8
Legal Aspects of Business- Tejpal Sheth pg. 231
9
(1860) 8 H.L. 268
10
Agency, Partnership and the LLC: The Law of Unincorporated Business Enterprises – J. Dennis and Mark J.

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to carry on the business, and, after paying the current expenses, to divide the net income
rationally among the creditors of Smiths, as often as there should be funds in hand sufficient
to pay one shilling in the pound. After all the creditors were paid in full, the property was to
be re conveyed to Smiths.
In the assignment, the creditors, named as trustees, were given power to make such rules and
regulations as the majority saw fit for the proper management of the business, and even to
discontinue the business, in case it did not promise success under those circumstances. The
name of the co. was Stanton Iron Company.
Cox and Wheatcroft, among others, were named as trustees; Cox never accepted, and
Wheatcroft, after acting for six months, resigned. After the resignation of Wheatcroft, the
other trustees, who continued to act in the conduct of the business, incurred certain
indebtedness to Hickman (who charged three bills of exchange); he brought the present
action against the defendants, Cox and Wheatcroft included, seeking to charge them as
partners in the business, and, therefore, liable for the debts of the business, incurred by the
trustees after the assignment.
Whether there is a partnership between the traders who were in essence the creditors of the
firm?

 CONTENTIONS
 The counsel for Wheatcroft contended that:
There was no action against the appellant, as if Hickman had heard that Cox and Wheatcroft
were the trustees, he would have realized that Cox had never been a trustee and Wheatcroft
had resigned.
The ownership of the partnership never changed and was still owned by the Smiths.
A qualified benefit derived from a trade does not make a person a partner in it. Here, unless
the profits are taken, there exists no partnership.

 The counsel for Cox contended that:

The defendant can be held liable only if:
He put his name on the bill
Authorised someone else to put their name on the bill
Held himself to have given the authority.
As to the first and third points he is not liable. As far as the second is concerned, the
defendant cannot be held liable unless an agency is proved.
It is up to the defendant to show that the plaintiff is a partner.

 The counsel for Hickman contended that:

There was a contract of partnership under which business was to be carried out for the
benefit of creditors
The scheduled creditors are allowed to participate in the profits of the firm thereby

partners may bind all the others by the acceptance of the bills in the regular course of
business

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  JUDGEMENT
The deed gave special powers to the creditors. They were given the choice by majority
regarding whether or not the trade should be continued and making rules and regulations as to
the carrying out of that trade, which are the powers that partners have.
The creditors, however, did not carry out the business of the trade when they could have but
let the trustees do the same. By this act of theirs, they did not make themselves partners of the
trade. If they had carried out they business they could have made sure none of the trustees
accepted the bill of exchange as they would be the principals.
The deed in this case is merely an arrangement between the creditors and the Smiths, to repay
the creditors out of existing and future profits. This relationship between the creditors and
debtors is not enough to constitute a relationship between a principal and agent. Trustees are
liable as they are the agent by the contract but the creditors are not the principals of the
trustees.

The following quotation from Lord Cranworth contains the decision of the Court "It was
argued that as they - the creditors, including Cox and Wheatcroft - would be interested in the
profits, therefore, they would be partners. It is often said that the test, or one of the tests,
whether a person, not ostensibly a partner, is, nevertheless, in contemplation of law, a
partner, is whether he is entitled to participate in the profits. This, no doubt, is in general a
sufficiently accurate test; for a right to participate in profits affords cogent, often conclusive,
evidence that the trade in which the profits have been made was carried on in part for, or on
behalf of the person setting up such a claim. But the real ground of the liability is that the
trade had been carried on by persons acting on his behalf. When that is the case, he is liable
to the trade obligations, and entitled to its profits, or to a share of them. It is not strictly
correct to say that his right to share in the profits makes him liable to the debts of the trade.
The correct mode of stating the proposition is to say that the same thing which entitles him to
the one makes him liable to the other, namely, the fact that the trade has been carried on on
his behalf, i. e., that he stood in the relation of principal towards the persons acting
ostensibly as the traders, by whom the liabilities have been incurred, and under whose
management, the profits have been made."

"Taking this to be the ground of liability as a partner", continued Lord Cranworth, "It seems
to me to follow that the mere concurrence of creditors in an arrangement under which they
permit their debtor, or trustee for their debtor, to continue his trade, applying the profits in
discharge of their demands, does not make them partners with their debtors or the trustees.
The debtor is still the person solely interested in the profits, save only that he has mortgaged
them to his creditors. He receives the benefit of the profits as they accrue, though he has
precluded himself from applying them to any other purpose than the discharge of his debts.
The trade is not carried on by or on account of the creditors, though their consent is
necessary in such a case, for without it all the property might be seized by them in execution.
But the trade still remains the trade of the debtor or his trustee. The debtor or the trustees are
the persons by or on behalf of whom it is carried on."

The decision of the Court of Common Pleas was reversed and the defendant’s were not held
liable. Sharing of profits was discarded as the true test of partnership and mutual agency was
made the authority in determining so.

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CONCLUSION

The definition of a partnership provides that the business must be carried on by all the
partners or any (one or more) of them acting for all, that is, there must be mutual agency.
Thus every partner is both an agent and principal for himself and other partners, i.e. he can
bind by his acts the other partners and can be bound by the acts of other partners in the
ordinary course of business.

To test whether a person is a partner or not, it should be seen, among other things, whether or
not the element of agency exists, i. e., whether the business is conducted on his behalf. It is
on the basis of this test that a widow of a deceased partner or a manager having a share in the
profits is not a partner, because business is not carried on her or his behalf. If she or he does
something the firm is not legally bound by that.

The importance of the element of mutual agency lies in the fact that it enables every partner
to carry on the business on behalf of others. Partners may agree among themselves that some
one of them shall not enter into any contracts on behalf of the firm, but by virtue of the
principle of mutual agency, such partner can bind the firm vis-a-vis third parties without
notice in contracts made according to the ordinary usage of trade. Of course he can be made
liable by other partner’s inter-se for exceeding his authority. In fact, the law of partnership
governing relations of the partner’s inter-se and with the outside world is an extension of the
law of agency. The law as to partnership is undoubtedly a branch of the law of the principal
and agent…. The liability of one partner for the acts of his co-partner is in truth the liability
of a principal for the acts of his agent11.

Where two or more persons are engaged as partners in an ordinary trade, each of them has an
implied authority from the others to bind all by contracts entered into according to usual
course of business in that trade.

Every partner in trade is, for the ordinary purposes of the trade, the agent of his co-partners;
all are therefore liable for the ordinary trade contract of the other. The public have a right to
assume that every partner has authority from his co-partners to bind the whole firm in
contracts made according to the ordinary usage of trade.”

11
Wheatcroft and Cox v Hickman

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BIBLIOGRAPHY

 University of Pennsylvania Law Review and American Law Register, Vol. 61, No. 8 (Jun.,
1913)

 Business law – P. C Tulsian (sec 16.5)

 Legal Aspects of Business- Tejpal Sheth
 Agency, Partnership and the LLC: The Law of Unincorporated Business Enterprises – J. Dennis
and Mark J.
 https://kanwarn.wordpress.com/2015/06/20/indian-partneership-act-part-iii-test-of-
partnership/
 http://www.shareyouressays.com/essays/five-essential-elements-of-partnership-in-
business/92215
 Contract and Special Relief – Avtar Singh
 Indian Partnership Act 1932 (Bare Act)

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