MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI.

CONTRACT LAW-II
SEMESTER-IV
FINAL DRAFT

HOLDING OUT IN PARTNERSHIP.

NAME: SIDDHANT LOKHANDE.

ROLL NUMBER: 2017-054.

COURSE: B.A., LL.B.

SUBMITTED TO: Prof. (Dr) ANAND RAUT.

DATE OF SUBMISSION:25th FEBRUARY 2019

INTRODUCTION- .................................................................................................................... 3

CHAPTERIZATION- ................................................................................................................ 4
A) ORIGIN AND OBJECT- .................................................................................................. 4
B) CONDITIONS FOR THE LIABILITY ARISING BECAUSE OF THE DOCTRINE ... 6
1) Representation-............................................................................................................... 6
2) Knowledge of representation ......................................................................................... 7
C) HOLDING OUT IN LLP .................................................................................................. 8
D) COMPANIES ACT........................................................................................................... 9
E) APPLICATION OF DOCTIRNE TO RETIRED OR OUTGOING PARTNER ............. 9
a) Deceased Partner- ......................................................................................................... 10
b) Insolvent Partner – ....................................................................................................... 10
c) Dormant Partner- ......................................................................................................... 10
F) APPLICATION OF THE DOCTRINE TO INCOMING PARTNER ............................ 10
G) HOLDING OUT BY OTHERS- ..................................................................................... 10
H) IMPORTANT CASE ...................................................................................................... 11

CONCLUSION ........................................................................................................................ 12
INTRODUCTION-

Partnership by holding out means when a person represents himself to be a partner of a firm
and a third party believes in such representation, the person afterwards cannot deny his liability
towards the third party.

The rule of agency by Estoppel has been extended to the case of partnership too. Holding out
is merely application of the principle of Estoppel which is a rule of evidence wherein a person
is prevented or ‘estopped’ from denying a statement he made or existence of facts that he makes
another person believe. Holding out refers to course of action or omission that leads others to
believe that one possesses an authority which in fact one does not. Simply put, if a person that
he is a partner of a particular firm, he is estopped from denying this representation later on.

Section 28 says that a person is held liable as a partner by holding out if:

a) he represented himself or knowingly allowed himself to be represented as a partner.

b) such representation may be by spoken or written words, by conduct or by knowingly

c) the other party on the faith of such representation gave credit to the firm.

For example, A and B are partners in a firm. Another person C manages the firm on their behalf;
places all the orders, makes the payments due etc. If C places an order, A and B will have to
pay for the same as they have allowed C to function as a partner and did not to inform the
suppliers or the customers that C was only a manager. But a person who is aware that C is not
a partner can not sue A and B to make good losses incurred by dealing with C.

A partner by holding out is liable to the person giving credit, to make good the loss which any
third party may suffer. But he does not acquire any claim over the firm. A person does not
become a ‘real’ partner but he does become liable for compensation to the third party whom
he induced as a partner by holding out and caused such man loss or injury. The real partners of
the firm are safe unless the partner by holding out has acted on their orders or with their consent.

Similarly, if a person is representing himself to be a partner, and the firm has knowledge about
such representation but did not do anything to stop such representation. So, when a third party
entered into a transaction with such person then firm would be liable for the act of such person,
but the liability would only be limited to such representation and cannot be unlimited.
Moreover, when a person is admitted to a partnership by way of holding out, he cannot claim
any rights in the property of the firm and his rights will be limited to such representation only.
Furthermore, if a third party knew about the reality behind the representation even though he
entered into transaction with such person then firm would not be liable for the transaction

Doctrine of Holding Out as defined in various legislations namely The Partnership Act1932,

The Limited Liability Partnership Act 2008, but mainly it derives its existence from the

provision of The Transfer of Property Act. If we look the dictionary meaning of the word

holding-out means: “conduct by a person leading another to believe that he possesses an

authority that in reality, he does not. Such conduct in effect amounts to a representation such
that he will be prevented by ESTOPPEL from denying that the authority exists. 1 So after
reading the definition from the dictionary its quite clear that the ostensible owner is no the real
owner of the property, he holds out the property to shoe\w the buyer that he holds it which can
be gainful to him but not to the buyer, so if someone brings action against the ostensible owner
he has to face lethal legal consequences.

CHAPTERIZATION-

A) ORIGIN AND OBJECT-

Sometime a person who is not a partner in fact is held liable as if he was a partner.The principle
of this liability is illustratively stated as by EYRE CJ in Waugh v. Carver 2 in the following
words:

“Now a case may be stated in which it is clear sense to the party to the contract that they shall
not be partners, that A is so to contribute neither labour nor money , and to go still further, nor
to receive any profits. But, if he will lend his name as a partner, the he becomes against rest of
the world a partner, not on the ground of real transaction between them , but upon the
principles of general policy, to prevent frauds to which creditors would be liable if were to

1
http://legal-dictionary.thefreedictionary.com/holding+out
2
Waugh v. Carver (1949) 2 KB 397
suppose that they lent their money upon the apparent credit to three or more persons, when, in
fact, they lent it only to two of them, to whom without the others they could have lent nothing.”

Thus where a retired businessman of some repute, on the request of certain persons, assumed
the honorary presidentship of their business, he was liable to those who gave credit to the firm
in bona fide belief that he was a partner.3 This doctrine is incorporated in the section 28 of the
Indian Partnership Act.4

Partnership by Holding Out is also known as partnership by estoppels. Holding out is merely
application of the principle of estoppel which is a rule of evidence wherein a person is
prevented or estopped from denying a statement he made or existence of facts that he makes
another person believe. In simple terms, if a person represents that he is a partner of a particular
firm, he is estopped from denying this representation later on. The doctrine of holding out has
been provided under section 28 of the Indian Partnership Act, 1932. Section 28 reads as:

“Holding Out - (1) Anyone who by words spoken or written or by conduct represent himself,
or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner
in that firm to anyone who has on the faith of any such representation given credit to the firm,
whether the person representing himself or represented to be a partner does or does not know
that the representation has reached the person so giving credit.

(2) Where after partner's death the business continued in the old firm-name, the continued use
of that name or of the deceased partner's name as a part thereof shall not of itself make his legal
representative or his estate liable for any act of the firm done after his death.”

The position of a partner by holding out is peculiar. He is liable to make good the loss which
the person giving creditor the firm may suffer, but he has no claim upon the firm. A partner
who has retired from the firm but allows the use of his name to continue with the firm may
become liable to third parties by the principal of holding out. Example: Retired from a firm
consisting of PX and R as its partners. He failed to give notice of his retirement. After his
retirement S joined the firm and the firm continued its business under the old name. One
creditor filed a suit for the recovery of his debt after the retirement of P. It was held the creditor

3
Lake v. Duke of Aryll. (1844) 6 QB 477: 115 RR 375
4
Sec 28, Indian Partnership Act, 1932 No .9 of 1932.
could make P and his co-partners and R liable for his debt on the principle of estoppel. But he
can not file a suit against P, X, Rand S, all of them together .Dormant or Sleeping Partner: A
person who is in reality a partner but whose name does not appear in any way as partner, nor
does he take part in the management of the business, and is not, therefore, known to outsiders
as partner in the firm, is called a dormant or sleeping partner. Such a partner is liable to third
parties who gave credit to the firm even without knowing of his being partner but subsequently
discovering the fact. A sleeping partner’s liability rests on his being in the position of an un-
disclosed principal. One important distinction exists between a sleeping and active partner
with regard to liability towards third parties. A sleeping partner is responsible for the debts of
the firm taken during the tenure of his partnership like an active partner. But his liability ceases
immediately on retirement and he is not supposed to give a notice on his retirement like other
active partners

B) CONDITIONS FOR THE LIABILITY ARISING BECAUSE OF THE DOCTRINE

A person may hold himself out or permit himself to be held out as a partner and yet conceal his
name. He may be referred to as a person who does not wish to have his name disclosed and if
he so referred to by his authority he will incur liability as a partner to those who give credit to
the firm on the faith of such representation.5 But it follows from the principles in the Section
28 of the Partnership Act mentioned above that a person cannot be held liable on the ground
that he held himself out to be a partner but this needs to be done before the contract was entered
into.6

There are two things which need to occur before a person could be held liable-

a) The alleged act of holding out must be done or knowingly suffered by him.

b) It must have been known to the person seeking to avail it.

1) Representation-

The person sought to be charged with liability for holding out must have represented himself
to be a partner in the firm. Representation may be made either by words, written or spoken or
by conduct. An express representation takes place when a person allows his name to be used

5
Martyn v. Gray (1863) 14 C.B. (N.S) 824; See Also Maddick v. Marshall (1864) 17 C.B. (N.S) 829
6
Baird v. Planque (1858) Fos. & Fin. 344
in the affairs of the firm for example, in the name ,title or signboard of the firm. In the case of
Bevan v National Bank Ltd.7

MW was the manager of one B’s business. The business was under the name of MW &co.

It was held that permitting his name to be used in the title of the firm, he had made a
representation that he was a partner and therefore he was liable to those who gave credit to the
firm.

Similarly when a person called Smith was appointed as a servant to take a warehouse and start
a business under the name of Smith & Co. and the goods were supplied to the firm, it was held
though not partners, the defendants were jointly liable; Smith holding himself out as a partner
and the appointer as the principal owner.8

Holding out may as well arise when a person knowingly permits or suffers himself to be
represented as a partner. These words came up for construction before court of Appeal in the
case of Tower Cabinet Co. Ltd v. Ingram9

Finding that Is’ name appeared on the paper of the firm on which the contract was concluded ,
they sought to enforce the judgement against him. I had not permitted his name to remain on
the papers, but he had not destroyed them before leaving.

Holding that he was liable, LYNSKEY J laid down that the plaintiff must prove that I
knowingly suffered himself to be represented as a partner. So here in this case this fact was not
possible to be found out as it was single notebook on which Is’name had appeared.

Bare knowledge that his name is being used may not make him liable by holding out. But is he
under duty to notify the world that he is not a partner? Knowledge in time may become consent
by acquaintances. Prudent men will always abundant caution in due season than run the risk of
losing much more in later season.

2) Knowledge of representation

The person seeking to hold another liable by holding out or estoppel must show that he had
knowledge of the representation and acted on it. It must be proved that:

7
Avtar Singh, Introduction to Law of Partnership, Eastern Book company.
8
Kirkwood v. Cheetam ,(1862) 2 Fost & F 798:175 ER 1290
9
(1949) 2 KB 397
"..the defendant had held himself out to be a partner not to the world-famous for that is a loose
expression,-but to the plaintiff himself, or under such circumstances or publicity as satisfy a
jury that the plaintiff knew of it and believed him to be a partner. He would then be liable to
the plaintiff in all transactions in which he engaged and gave credit to the plaintiff upon the
faith of his being a partner."

If the plaintiff has acted on the faith of the representation, liability is incurred to him and it is
immaterial that the defendant did not know that is representation had reached the plaintiff. But
if the plaintiff has not heard of the representation, or having heard did not believe it or knew
the real truth or would have given credit to the firm in any case , no liability by holding out
arises because he has not been misled by the representation.

No one can be held liable by holding out for the tort , crime or other wrongful conduct of a
partner because such liability has nothing to do with the fact of representation.

The other party on the faith of such representation gave credit to the firm.

For example, A and B are partners in a firm. Another person C manages the firm on their behalf;
places all the orders, makes the payments due etc. If C places an order, A and B will have to
pay for the same as they have allowed C to function as a partner and did not to inform the
suppliers or the customers that C was only a manager.

But a person who is aware that C is not a partner can not sue A and B to make good losses
incurred by dealing with C.

A partner by holding out is liable to the person giving credit, to make good the loss which any
third party may suffer. But he does not acquire any claim over the firm. A person does not
become a ‘real’ partner but he does become liable for compensation to the third party whom
he induced as a partner by holding out and caused such man loss or injury. The real partners of
the firm are safe unless the partner by holding out has acted on their orders or with their consent.

C) HOLDING OUT IN LLP

Section 29 lays down that any person who holds out, or allows himself to be held out as a
partner of an LLP shall be held liable to the person who on faith of such representation gives
credit to the LLP. This means that the partner holding out shall be bound by estoppel and
prevented from escaping the liability incurred on account of any financial aid received by him
or the LLP. This makes the LLP bound to the third party to the extent of the financial benefits
received by them. But, that is the only liability which binds the partner by holding out and the
LLP, the estoppel does not operate in a way which makes the partner by holding out partake in
the LLP’s business activities. It’s only the rule of estoppel that binds the partner by holding
out.

D) COMPANIES ACT

Part 2 of the companies act 1981 has not made any direct alterations in the law on the subject
of holding out. But the provisions of the act, which require the names and addresses of partners
in the firms having a place of business and carrying on business under a name which doesn't
consist of surname of all partners to be shown on all business letters and other documents issued
by the firm(section 7 of the act) to be shown on all business letters and in a notice prominently
displayed in the partnership premise , operate to reduce the risk of any person who is not a
partner held out as one.

E) APPLICATION OF DOCTIRNE TO RETIRED OR OUTGOING PARTNER

A partner who goes out of a firm in which the remaining partners continue to carry on the
business is called retired or outgoing partner; A retired partner continues to be liable for all
debts and obligations of the firm incurred before his retirement. A, B and C are partners and D
is the creditor of the firm. A retires from the firm. A remains liable to D. Two years after A’s
retirement the firm becomes insolvent. A wil1 be liable for the debts existing at the time of his
retirement. A retired partner will be liable for all-debts incurred after his retirement if he fails
to give proper notice of his retirement. In that case he is deemed to be a partner by holding out.
A retiring partner will also be liable to third parties for all transactions of the firm began but
unfinished at the time of his retirement, even though notice of his retirement is given to third
party. A retiringpartner may, however, be discharged from the liability by the consent of the
creditors. The remaining partners will be liable in such a case. This rule is the application of
the general rule of the law of contract known as “Novation”. An important application of the
doctrine takes place when the partner retires and the public notice of the same isn’t issued, then
the partner remains liable by holding out to those customers of the firm who have given credit
without knowledge of retirement.10

10
Lindley and Banks on Partnership, 20th Edition, Sweet and Maxwell.
But the principle of holding out on retirement without giving a public notice doesn’t apply in
following cases-

a) Deceased Partner-

The estate of deceased partner is not liable for any act of the firm done after his death even if
the business is continued by the surviving partners in the same style and place and even his
name appears in the name and affairs of the firm.

b) Insolvent Partner –

insolvency of the partners also terminates his liability forthwith. A person ceases to be a partner
from the date of his insolvency and his estate is no more liable for any act of the firm done after
his insolvency.

c) Dormant Partner-

A dormant or a sleeping partner means a partner whose existence as a partner is not reflected
by the name of the firm or otherwise. He has never taken part in the conduct of the business as
a partner and therefore he is not known to the customers of the firm. He liable for the acts of
the firm but when he is to retire his retirement may not be made known to the public.

F) APPLICATION OF THE DOCTRINE TO INCOMING PARTNER

A person who is admitted as a partner into an already existing firm with the consent of all the
partners is called an incoming or new partner. The incoming partner does not become liable
for any act of the firm done before he becomes partner, unless he agrees to be so liable. His
liability commences from the date of admission as a partner.

G) HOLDING OUT BY OTHERS-

11
Spooner v. Browning (1898) 1 QB 528
have authorise holding out then such a person cannot escape liability. But if he is truly held out
by others who had no authority to do so then he will not be liable.

H) IMPORTANT CASE

SCARF vs. JARDINE is an important case for the principle of holding out wherein the
importance of notice of retirement was highlighted. A partner must give notice of his retirement
from a firm the same way the notice of a new member to the firm is made to the public so that
people know about his status or rather the absence of participation of such retiring person in
the firm. Otherwise, he might be treated as partner by holding out no matter how long back he
retired from the firm without notice.

Thus, the liability of a retired partner to old creditors or customers continues till a notice of his
retirement is given. Similarly, the firm will also be liable for the retired partner, should just a
situation arise, if the notice has not been give. It is immaterial whether the retiring partner gives
the notice or the other partners.

SCARF v. JARDINE 1882 7 APP CAS 345 – 198, 371, 431 43512

FACTS: A firm consisted of two partners, Scarf and Rodgers. Scarf retired and Beach joined
in his place. The business was carried on as before and no public notice about the change of
partners was given to the customers of the firm. Jardine was an old supplier to the firm. He
supplied the goods ordered without any idea about the change. He came to know about the
change when the firm failed to pay the dues and he was considering a legal action against the
firm. He preferred to sue the new firm which subsequently went bankrupt. Then he sued the
earlier partner, Scarf.

HELD: He had a right against Scarf provided he had proceeded against the old firm and partners
in the first instance itself. Now he had acknowledged the new firm, he could not reject its
identity and sue Scarf. It was held that novation might involve either a change of parties with
the contract remaining the same or a change in the contract between the same parties. An
implied agreement is presumed from the fact that the creditor, after the knowledge of the
change, has brought a suit against the new firm. Jardine knew of the change of the constitution
of the firm when he sued and he chose to sue the new firm. Now he could not sue the older

12
SCARF v. JARDINE 1882 7 APP CAS 345 – 198, 371, 431 435
firm for the same cause of action as it is against principles of natural justice as well as
Partnership Act.

There are exceptions to the rule established in the SCARF vs. JARDINE case as given below:

a) Death of a partner constitutes sufficient notice by itself.

b) Insolvency of a partner is also sufficient notice and attracts Section 42 of the Indian
Partnership Act.

c) If one has been a dormant or sleeping from beginning to end, notice can be dispensed with
as neither the customers nor the clients know of his participation in the firm.

In English law, Partnership by holding out is referred to as apparent partnership instead and the
legal provisions in both countries are very similar.

In SMITH vs. BAILEY 2 QB 432, it was decided that the liability on the principle of Estoppel
extends only on account of credit given to the firm and not to torts or civil wrongs committed
on behalf of the firm.

CONCLUSION

The rule of agency by Estoppel has been extended to the case of partnership too. Holding out
is merely application of the principle of Estoppel which is a rule of evidence wherein a person
is prevented or ‘estopped’ from denying a statement he made or existence of facts that he makes
another person believe. Holding out refers to course of action or omission that leads others to
believe that one possesses an authority which in fact one does not.

Simply put, if a person represents that he is a partner of a particular firm, he is estopped from
denying this representation later on. This rule is also applicable in cases of LLPs and
Companies thus the project has analysed different aspects of the doctrine and its application in
the partnership law and also has analysed one of the important case on the doctrine.