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Running a business under a partnership structure typically means you will discuss business decisions with your partner(s) alone. However, the law governing the ability of non-partners to enter agreements on behalf of the partnership is more complicated than you might expect. There are limited cases where a non-partner can bind the partnership to an agreement, even where the partnership does not consent. This article will explain how these circumstances arise.
Partnerships and the Law of Agency
Agency law governs the ability of one person (the agent) to act on behalf of another (the principal) and enter into agreements on the principal’s behalf.
For instance, suppose your business partner Jimmy negotiates the purchase of a new IT system for the partnership. Here, Jimmy would be acting as an agent for you and the other partners. Jimmy’s decision thereby binds all the partners.
Non-Partners and the Law of Agency
Actual Authority
Generally, there is no automatic restriction on the ability of a non-partner to bind your partnership. This may strike you as surprising, but there are situations where a partnership might benefit from allowing a non-partner to act on its behalf.
For instance, you may hire a sales manager to manage a particular division of your business. Rather than require the sales manager to report to one of the partners every time they need to enter into a transaction, the partnership could authorise this person to use their discretion to agree to certain deals. For example, you might grant a sales manager to power to agree to any transaction valued at less than £1,000.
This power is called actual authority. In this scenario, the principal (i.e. the partnership) gives the agent their consent to act on their behalf in a narrow sense.
Apparent Authority
Using the above example, what if the sales manager authorised a sale for £1,500? Have they exceeded their power, allowing you to void the transaction? The answer is not necessarily. In fact, in the present circumstances described, your partnership would have difficulty releasing itself from the agreement.
The crucial consideration is the appearance of authority. In the example, the other contracting party would reasonably believe that someone with the title of sales manager could feasibly enter into a £1,500 transaction. Ultimately, the law would say that the agent has the apparent authority to authorise the transaction — apparent from the perspective of the counterparty.
Therefore, if an agent has apparent authority to enter the transaction on behalf of the partnership, the partnership is bound.
No Apparent Authority
If the counterparty of a transaction had no reason to believe that the agent had apparent authority, your partnership might be able to rescind the agreement. Ultimately, any disputed transaction involving the power of an agent to bind your partnership will depend on the facts of the transaction.
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Recourse Against An Erring Agent
Where your agent is not an employee, you may be able to claim against them for exceeding their power. For instance, say you appoint a broker to act as your agent, and he sells a piece of property undervalue. While the partnership may have to complete the transaction, you could claim against the broker for damages, such as the property’s market value less the price you received.
If your agent is an employee, the situation is more complex. For serious misconduct, the employment contract will likely entitle you to terminate their employment. However, your ability to recover damages is likely to be limited if the employee did not act fraudulently or with willful misconduct.
Key Takeaways
A non-partner can make decisions for your partnership if they act or appear to act to an outsider as an agent. Agents take many forms, such as employees, brokers, solicitors, and accountants. If the agent has actual or apparent authority to make a decision with a third party, your partnership may be bound. However, if the third party knows that the agent does not have the power to make a decision, the law says there is no agency. In which case, the third party cannot compel you to stick to the agreement.
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Frequently Asked Questions
Partnerships automatically arise when two or more people carry on business “in common” with the view to making a profit.
Yes, in short, a non-partner can make decisions for your partnership where they have actual authority to do so, such as if you grant them the power. Additionally, if the other party to the agreement has good reason to believe they have the power to act — even if they do not — the law may bind your partnership. This is the case even if the partnership does not consent to the agreement.
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