File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Mutual Agency

A mutual agency is a lawfully binding relationship which is entered into by the business partners, and it gives all the partners of the business equal authority on behalf of the business., Each and every partner with the agreement of mutual agency becomes an agent of the business in equal terms and, thus, has the power to make decisions for business, which create a binding agreement with the third party[1].

Each of the partners to form this relationship must have the powers to authorization, and the capacity to enter into a business contract. With the formation of the mutual agency, an agreement of partnership should be created. The particular agreement should highlight the welfares of the partnership agreed and also provide the details of position of each partner in the business. Entire details should be in the written form and this is done to minimize any change of misunderstandings or confusion at a later stage[2].

A mutual agency can be understood as a business marriage, which makes each partner answerable and liable for the actions of the other partner in the same manner as if it was done by him only, even if they don't approve of what has been done. Every partner may act as an individual in their daily errands, but eventually, the partners are each liable for the actions appropriated by the other. Nevertheless, the mutual agency only subsists if the partners are acting within business range which is normal in practices or operations.[3]

A Retail partner who buys goods from a supplier and hence, necessitates the partnership to provide the payment for the procured items is an example of mutual agency. The partnership is in charge for the purchase as it falls within span of a normal business operation. Mutual Agency would not be inclusive of a retail apparel partner who is procuring an investment in the real estate property.

The partner wouldn't be able to have a contract with their partners within this deal since it doesn't fall in the bounds of the standard operations of their retail business. One more example for a mutual agency would consist of the choice of an insurance agent.

When you are hiring this agent, you present them with the endorsement to deal with the insurance companies and they also on your behalf act through the process. Since operating with the insurance companies can be confusing and difficult in case you don't have any prior experience, then it is the job of the insurance representative to make the process comprehensible for you. This is the of creation of a mutual agency.[4]

Literature Review
In making this research project, I referred to commentaries and books on The Indian Partnership Act of 1932 by a number of authors. There is an enormous amount literature of fine quality which is readily available on the topic and I also referred to articles and blogs for the making of the research project.

I referred to Pollock and Mullah's Indian Partnership Act by GC Bharuka which gave the background of the Indian Partnership Act and how it was enacted in India. There is rarely any topic on which the book has not poured out its clear thoughts for the topic. The content is bewildering. It also draws a comparison between the Indian and the UK law of Partnership and also gives the importance of Partnership in present day scenario. The book is very small compared to the content it clears out.

To clarify my further queries and to get a clear idea about the sections, I further referred to the book on the Law of Partnership by M.R. Mallick. The book made me understand each and every part of the section in a very understandable manner and it also gave a lot of example for the same due to which the concept became very clear. It explained in detail about the mutual agency and how to go about it. The content of the book was very concise as well as articulate in nature.

Another book which I referred to was by T.S. Venkatesa Iyer titled "Law of Partnership". This book also elucidated as well as clarified about the topic and the language of the section was very uncomplicated which cleared my further uncertainties and doubts regarding the same. The book was used by me as a reference book along with the book by M.R. Mallick. It includes a variety of material of substantive nature.

I also referred to the commentary on the Law of Indian Partnership in India by S.C. Mitra and Pradeep Kacker which is a critical exposition and an exhaustive analytical commentary on the act. This commentary helped me to find the landmark cases which have come up under the topic of the mutual agency. This commentary was very helpful for me to analyze how the landmark judgements have been aiding in the shaping as well as evolution of the section on mutual agency.

Another commentary I referred to was by PC Markanda, "The Law of Partnership". It has a plethora of cases on the topic which give the principles in a very well-defined manner. It incorporated both Indian and Foreign case laws in a bulk and excerpts from other commentaries and authors as well. It has clearly laid a distinction between all the section of Indian Partnership Act.

The last book I insinuated to was the Law of Partnership by Avtar Singh. It has tried to grapple the perpetuated problems of the act and its various sections. It has systematically integrated knowledge of the statutory provisions and judicial decisions which are relating to the genuineness of a partnership. It has been designated to serve the purpose of suits arising from the partnership affairs.

Research Objectives
  • To understand Mutual Agency under Indian Partnership Act of 1932.
  • To examine whether mutual agency is an advantage of disadvantage for the business.
  • To understand the liability of the partners under Mutual Agency.
  • To look into the landmark judgements that have been passed in regard to the section of mutual agency.
Under the Indian Partnership Act of 1932, the terms mutual agency defines that the business must be carried out the all the partners or any one of them acting on the behalf of all and the mutual agency is one of the five elements of a partnership. The gist is that the partner has a dual role of a partner as well as an agent.

It is the truest test of a partnership. There are both advantages as well as disadvantages of the mutual agency but when seen in altogether, it is more of an advantage for the business as well as partners in the business and the court has passed a number of landmark judgements which makes this clear and has also helped shape the section itself.

Research Questions
  1. What is the liability of the partners under the mutual agency?
  2. Analyze whether Mutual Agency is an advantage or a disadvantage for the business?
The research project is divided into three chapters after the synopsis which introduces the topic, mentions the literature review, the research objectives, hypothesis and research questions as well. The first chapter deals with the principle of mutual agency. The second chapter deals with the aspect of analyzing whether the section of mutual agency is an advantage or disadvantage and both the chapters mentions the landmark cases which are there under this section and also under the particular clause.

After this, there is conclusion which sums up the entire idea of the research project and lastly there is bibliography which mentions all the sources which have been used in the making of this project.

What Are The Principles Of Mutual Agency?

The definition of mutual agency states that all the partners or any partner/s acting on behalf of all of them must carry out the business and mutual agency is one of the five crucial elements of partnership. It is a legally binding relationship. Every partner is an agent in the business and has the authorization of taking the decisions for the business which bind or commit the relationship as a whole to the third-party business agreements.

The Mutual Agency exists only for those partners who act within the scope of normal business dealings and operations[5][6]. In Chimaran Motilal v Jayantilal Chhaganlal it was said by the court that there can be partnership in a sole transaction and combined profits and contribution to losses are indication of partnership but by themselves they aren't sufficient to constitute a partnership. Agency is an indispensable element of partnership. [7]

Section 4 of the Indian Partnership Act 1932 defines the terms partner, partnership, firm and firm name. According to the section the agreement between the parties to share profits of the business is partnership. Individually the concerned persons are known as partners and collectively as the firm.

The business is carried out under the name of the firm name.[8] In this section the term partnership has been used to define the relationship and no other sense. The agreement for the sharing of the profits should be voluntary in nature, the firm is for the procurement of gains and profits and the for the act of one partner, all the persons concerned are to be held accountable.

There are three elements of the partnership. The first is that there should be an agreement which is entered into by the concerned persons, second that the agreement is for the sharing of profits and third is that the business is to be carried out by all the partners collectively or by any of them acting on the behalf of all the persons concerned in the firm.[9]

In the case of Regional Director, Employees' State Corporation v Ramanuja Match Industries[10] the Apex Court has held that the status of the partner qua the firm isn't that of a master - servant or employer - employee which perception is inclusive of an element of subservience but that of equality. The partner's status qua the firm is quite different from that of the employees which are working under or for the firm. It might be that the partner is being rewarded some stipend for any kind of special attention which he has devoted but that wouldn't encompass any change of position and produce him within the description of employee.

In KD Kamath & Co. v CIT[11], it was help by the Supreme Court that there are two essential conditions which need to be satisfied for a partnership. In this case the company was denied registration as a partnership firm for not having satisfied the requisites of such a firm. A partnership firm has two essential requirements that the partner share profits and losses among themselves and that there is mutual agency.

The court held that the agreement among the partners concerned should be both for the profits as well as the losses incurred and the business is to be carried out by all of them collectively or any of them acting on the behalf of all. The fact that the exclusive control and power within the agreement of the partners is vested into one of them or the operation of the bank accounts as well borrowing and lending power due to the circumstances is with one partner are not against the elements of the mutual agency provided that the two mentioned essential featured are satisfied.

In this KD Kamath had all the power mentioned above but the court said that he was acting as an agent on the behalf of all the partners working in favor of the firm and not individual capacity. The management and controlling power if vested with one partner does not make the partnership illegal and thus it was held that in this case it is a partnership firm.

In Pratibha Rani v Surajit Kumar[12] and GS Dugal & Co. v CIT[13] it was held by the court that while the question whether the entrustment and custody of stridhan is considered with constitutes partnership of husband it was held to be a simple and pure entrustment of stidhan without any legal rights being created for the husband. The only thing is that the articles are in his possession which does not constitute legal partnership or co-ownership as defined in Section 4 of The Indian Partnership Act 1932.

In Bhimji Naik v CIT[14], the facts are as follows; The General Manager R carried out the business in South Africa and there were three managers according to the deed agreed upon by R in 1937. They were not to be disclosed as partners to the public and merely managers and the power of attorney was given to them by R. R became the creditor of the firm when the liabilities and assets of the business were overtaken by the new firm. R retained 8 annas of the share from the profits and losses of the business while the others were to be the owners of the balance. R had the right to dismiss any partner described as manager if there was any misconduct and he was to be the sole judge of the misconduct when taken place.

He also had the overall control of the business and the managers were to carry out all the instructions given by him from time to time. The issue in the case was that it was alleged that this does not constitute a partnership as the control was resided with single partner and there was no equality in the partnership.

But the court held that this does constitute partnership as though R had wider powers which were found itself in the deed as being conferred to the senior partner but it nevertheless created the relationship of the partners and not that of employee - employer. Also, the profits and losses were to be borne as per the proportion stated in the partnership deed.

In Babu Lal Piyarelal v Kanhaiya Lal [15] The court said that it was clear the mere usage of the words "partnership" and "partner" and merely arranging for sharing of profits by lenders of the capital does not constitute a true partnership but due weightage needs to be given to them. If the contributors of the money arrange for the appropriation of the profits in the agreed proportions it is though in practice a partnership but it does not necessarily become one.

But it undoubtedly becomes a partnership when the elements of mutual agency are satisfied. In Janki Nath Paul v Dhokarmal Kedar Bux[16] the principle of a firm being merely a partnership and not legal personality was given. The court also said that whether mutual agency is a binding agreement between the concerned partners is also a test of the partnership.

In Mohd. Musa v N.K. Mohd. Ghouse[17] the court said that the staunchest test for determination whether a person who has received share of the profits in the firm's business or who isn't a partner in the business has to keep a check that the there is a relationship of principle and agent which subsists among them and also to examine that the business activities carried out by all of them are for the good of the firm and the business and not for their personal profits.

There should also be partners who are authorized to work on the behalf of the firm in regard to particular work and sharing of profits is not the sole purpose of the partnership. The question is that of authority and agency.

Section 18 of the Indian Partnership Act states Partner to be an agent of the firm. Every partner is to be an agent of the firm under which the business is carried for the sharing of the profits and losses. The acts of each partner are binding upon the firm and his partners as well unless there is no such authorization to do the particular work.

When a negotiable instrument is drawn by the partner in trading firm the other partners are not any less liable because of the fact the absence of the name of the partner in the face of the instrument. This was given in the case of Chandann Lal Joura v Amin Chand Mohan Lal.[18] It was also given that the maxim to define such a relationship is qui facit per alium facit per se is applicable.

In the case of Ghulam Mohammad v Sohna Mal[19] the court said that as among the partners and the world outside, irrespective of whatever may be their personal arrangements between themselves, the partners are each an unlimited agent of every matter concerning the firm's business or which she represents as the partnership business and the nature of the act not being beyond the partnership. The rule is applicable equally to the Hindu Joint Family firms and the concerns of ordinary partners.

In Motilal Manucha v Unao Commercial Bank Ltd [20] it was given that the partner of a mercantile firm has the authorization to accept as well as draw bills on the behalf of the firm itself and even if such an implied authority has to be expressly nullified or cancelled but such nullification or cancellation hasn't been brought to the attention of the discounting banks and therefore the discounting banks have the entitlement to recover the damages against the other partners as well.

What Are The Advantages And Disadvantages Of Mutual Agency?

Mutual Agency has both advantages as well as disadvantages in a partnership but mutual agency is seen as a disadvantage as a whole for a partnership. But we cannot unseen the advantages that it has for the business and the partners also. A pro of the mutual agency is that since it allows multiple partners with the authorization to make transactions as well as deals for the business, it lessens the burden of the partners.

Such an arrangement splits the responsibilities and the duties of the partners therefore allowing the smooth and efficient functioning of the business thereafter making sure of the venture to be a success as each partner can focus on their own sphere in the business and there is a surety that no interference is caused in the work of other apart from checking the work of other to make sure that it is being done in the right way to benefit the business.

This ensures the expansion and the growth of the business in a positive sense which would be beneficial for both the business and the partners. It is crucial to have a good business plan along with efficient business partners and this provision ensures for the same. The division of the responsibilities among the partners is also assists in the quick business expansion and growth ensuring success. [21]

The main disadvantage of the mutual agency is that all partners can collectively be encumbered and also legally contracted by the actions of a single partner which can be unjustified at times but this is also to make sure that there are checks and balances which are maintained within the business as it does not belong to an individual but belongs to all of them together. This elucidates that if bad decision is made by one them all of them have to pay for the mistake of one.

This is a way of ensuring that all the partners aware of the activities and the tasks which are performed by other partners and to see that it is for the benefiting of the business and not for the individual only. The profits and loses should be equally shared unless given in the contract of partnership. This leads to the hinderance of all the partners due to the undesirable action of one.[22]

Before the company is started, mutual agency is a risk that the partners have to weigh. The contracts which are entered into by agents and that are binding to all the partnership as well as the third party which has knowledge of the agency in partnership. This is the reason why the partners who have the chance to negotiate at different hierarchies of the agency for each partner and also restrict the authorization of the powers for selection of individuals for the protection of the company.

If one partner makes a poor decision, it can even affect the business in negative sense therefore turn out to be a backlash for the business furthermore making the business run in a loss. [23]

The Indian Partnership Act very clearly lays down the principles which are to be followed and relied upon for a partnership for the roles of the partners and the mutual agency. It is about the rights of the partners which are mutual and also makes it clear that in a partnership, the acts of one or all partners would be treated as the action of all of them collectively and in case of any default in the duty, all of them would be held liable in the same capacity. Before a company is started by the potential business partners, the risk of the mutual agency should be analysed at the very beginning itself.

The contracts which are entered into by each of the partners in a mutual agency are legally binding to all the involved parties. The agreement of the partnership basically mentions the number of partners with whom the agreement would be entered into, which will be at least two or more. The agreement also specifies the split as well as the sharing of profits which is made by the company/firm. It also mentions the partner(s) which will hold major number of the shares in the business' financial gains.

The details of the mutual agency although may differ for various business industries or sectors but the standards and the requirements of the agreements are still the same. The indication of the partner responsible should always be clear about the performance of partners in certain business duties and also about who is to be relied upon for managing all those duties. In establishment of these expectations and roles within the agreement would help decrease chances for any type of doubts and confusion in the future of the partnership.

Establishment of these expectations and boundaries effectively at the starting of the formation of a business is also essential for the business to be successful and also for it to be a victory and win-win situation for the involved parties/partners. Misunderstandings, lawsuits and errors are created when it is waited till after the establishment of the business which can prove to be a failure for the business.

This delay can ultimately be in the creation of the partnership agreement which can hence easily ruin the relationship among the partners and furthermore create many negative impacts for the business.

The mutual agency is itself a disadvantage for the business partnership as in this even others are held liable for the wrongdoing of one or more but if we see this from a holistic point of view, it makes the business more efficient and there are more cautions which are followed by every partners and due to this there is a system of checks and balances which is created for the business as the partners check the work as well as the activities of each other. This is necessary for the smooth working or the partnership as well as the business itself.

  1. Pollock and Mulla, "The Indian Partnership Act" (7th Edn)
  2. Dr. Madhusudan Saharay's, "Indian Partnership Act and Limited Liability Partnership Act" (2nd Edn-2013)
  3. R.K. Bangia's , "Indian Partnership Act" (13th Edn - 2017)
  4. Lindley and Banks on Partnership (18th Edn)
  5. Goyle's, "The Law of partnership" (2nd Edn- 2006) by M.R. Mallick
  6. T.S. Venkatesa Iyer's, "Law of Partnership"
  7. "Law of Indian Partnership in India" by S.C. Mitra and Pradeep Kacker
  8. S.K. Malik's, "The Partnership Act" (2008)
  9. PC Markanda, "The law of partnership" (2010)
  10. Avtar Singh's "Law of Partnership" (Edn 4)
Case List:
  1. Regional Director, Employees' State Corporation v Ramanuja Match Industries
  2. KD Kamath & Co. v Commissioner Income Tax
  3. Pratibha Rani v Surajit Kumar
  4. GS Dugal & Co. v Commissioner Income Tax
  5. Bhimji Naik v Commissioner Income Tax
  6. Umarbhai Chandbhai v Commissioner Income Tax
  7. Chimaran Motilal v Jayantilal Chhaganlal
  8. Babu Lal Piyarelal v Kanhaiya Lal
  9. Janki Nath Paul v Dhokar mal Kedar Bux
  10. Commissioner Income Tax v Pathrose Rice and Oil Mills
  11. Mohd. Musa v N.K. Mohd. Ghouse
  12. Chandann Lal Joura v Amin Chand Mohan Lal
  13. Ghulam Mohammad v Sohna Mal
  14. Motilal Manucha v Unao Commercial Bank Ltd
  1. Pollock and Mulla, "The Indian Partnership Act" (7th Edn)
  2. Ibid
  3. Dr. Madhusudan Saharay's, "Indian Partnership Act and Limited Liability Partnership Act" (2nd Edn-2013)
  4. R.K. Bangia's , "Indian Partnership Act" (13th Edn - 2017)
  5. CIT v Pathrose Rice and Oil Mills AIR 1959 Ker 246
  6. Pollock and Mulla, "The Indian Partnership Act" (7th Edn)
  7. Chimaran Motilal v Jayantilal Chhaganlal AIR 1939 Bom 410
  8. Section 4 of the Indian Partnership Act 1932
  9. Umarbhai Chandbhai v CIT (1952) 22 ITR 27 (Bom)
  10. Regional Director, Employees' State Corporation v Ramanuja Match Industries (1985) 1 SCC 218, para 4 and 9
  11. KD Kamath & Co. v CIT (1971) 2 SCC 873 para 28, (1971) 82.ITR 680 (SC)
  12. Pratibha Rani v Surajit Kumar AIR 1985 SC 628
  13. GS Dugal & Co. v CIT (1978) 111 ITR 757 p 768 (Bombay)
  14. Bhimji Naik v CIT AIR 1945 Bom 271
  15. Babu Lal Piyarelal v Kanhaiya Lal AIR 1953 VP 43
  16. Janki Nath Paul v Dhokar mal Kedar Bux AIR 1935 Pat 376
  17. Mohd. Musa v N.K. Mohd. Ghouse AIR 1959 Mad 379
  18. Chandann Lal Joura v Amin Chand Mohan Lal AIR 1960 Punj 500
  19. Ghulam Mohammad v Sohna Mal AIR 1927 Lah 385
  20. Motilal Manucha v Unao Commercial Bank Ltd AIR 1930 PC 238
  21. Dr. Madhusudhan Saharay's, "Textbook on Indian Partnership Act" (2nd Edn-2013)
  22. Pollock and Mulla, "The Indian Partnership Act" (7th Edn)
  23. S.K. Malik's, "The Partnership Act" (2008)

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly