Partner's authority to bind the firm despite an internal spending limit (Partnership Act 1890 s.5)
Emeka and Signe run a graphic design studio in England as a general partnership under a written partnership agreement. The agreement provides that neither partner may order equipment costing more than £5,000 without the other's consent. Without consulting Signe, Emeka orders a £9,000 large-format printer for the studio from Prism Supplies Ltd. Prism regularly supplies design studios and knows that Emeka is a partner, but it knows nothing about the spending limit in the partnership agreement. Signe refuses to pay for the printer.
Is the firm bound by the contract with Prism Supplies Ltd?
Choose one answer to see the reasoning.
Worked answer
Correct answer C: Yes, because buying equipment is within the usual way of running a design business, and Prism knew Emeka was a partner but not of the restriction.
THE RULE TO REMEMBER
A partner acting in the usual way of the firm's business binds the firm unless he lacks authority and the third party knows it or does not believe him a partner (PA 1890 s.5).
Partner's authority to bind the firm despite an internal spending limit (Partnership Act 1890 s.5)
Section 5 of the Partnership Act 1890 makes every partner an agent of the firm and of the other partners for the purpose of the partnership business. A partner's acts in carrying on, in the usual way, business of the kind carried on by the firm bind the firm and all the partners. The exception applies only where the partner in fact has no authority and the third party either knows that or does not know or believe him to be a partner. Ordering a printer is within the usual way of carrying on a design studio's business. Emeka lacked actual authority because of the £5,000 limit, but Prism did not know of the limit and knew he was a partner. The exception therefore does not apply, and the firm is bound. Signe's remedy, if any, is against Emeka under the partnership agreement.
Why A is wrong: Lack of actual authority matters only if the third party knew of it or did not know or believe the person to be a partner; Prism knew neither.
Why B is wrong: Ratification is not needed, because the firm is already bound under s.5 by Emeka's apparent authority.
Why D is wrong: Section 5 binds the firm and all the partners, not only the partner who acted.
Why E is wrong: There is no filing requirement for a general partnership agreement; an internal restriction binds outsiders only if they know of it.
A little more practice done.
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