1. This is an appeal by the plaintiffs in a suit for recovery of money. The claim has bean decreed against the first defendant but dismissed against the second. The question in controversy now is, whether the plaintiffs are entitled to a decree against the second defendant, and if so, for what amount.
2. The plaintiffs are money-lenders. The first defendant is a contractor. Among various works which he had undertaken, he had in hand a contract under the Bengal-Nagpur Railway Company in connexion with what is known as the Kharagpur Line Sub-Division. In this business, the second defendant was his partner under a deed executed on the 28th June, 1920, though the partnership had commenced on the 28th March, 1920. The partnership was dissolved by a con-sent decree on the 16th June, 1922, in a litigation between the defendants. The plaintiffs seek to recover from the defendants three sums of money for three successive periods. The first period covers the time between the 11th January, 1920, and the 28th March, 1920, that is, the period immediately antecedent to the formation of the partnership between the defendants. The second period covers the time between the 3rd April, 1920 and the 12th June, 1920. The third period covers the time between the 14th June, 1921, and the 25th September, 1921. The second and the third periods, it will be observed, are subsequent to the formation of the partnership between the defendants. The plaintiffs, however, have distinguished between the two periods on the ground that it was not till the 13th June, 1921, that they became aware of the existence of the partnership. It is plain that as regards the small amount; claimed in respect of the first of these periods, the second defendant cannot be held liable, because at that time there was no partnership between the two defendants. We are consequently concerned with the sums claimed in respect of the second and the third periods.
3. The case for the plaintiffs is that the contract business already mentioned was carried on by the first defendant on be-half of the partnership that in order to enable him to carry it on he took loans from the plaintiffs on promissory notes and that the sums so borrowed were in fact applied for the partnership concern. These allegations, however, have not been made out; the evidence was not specifically directed to these points, and its seems their significance and importance was not fully realized. The accounts which were produced at a very late stage of the proceedings could not be scrutinised in the original, as they were written in characters difficult to decipher; and when the translations were placed in the hands of the Court, it was impossible to deal with the question satisfactorily. Apart from this, the grounds assigned by the Subordinate Judge for dismissal of the suit against the second defendant are open to criticism and there has consequently been considerable discussion at the Bar as to the liability of a dormant partner.
4. Section 251 of the Indian Contract Act which furnishes the guiding principle applicable to questions of the power of a partner to bind his copartners, is in these terms: 'Each partner who does any act necessary for or usually done in carrying on the business of such a partnership as that of which he is a member, binds his co-partners to the same extent as if he were their agent duly appointed for that purpose.' There is an exception to this rule formulated in the following terms:
If it has bean agreed between the partners that any restriction shall be placed upon the power of any of them, no act done in contravention of such agreement shall bind the firm with respect to persons having notice of such agreement.
5. This section enunciates the law substantially in the same way as in the judgment of the Judicial Committee in Bank of Australasia v. Breillat (1847) 6 Moo. P.C. 152
6. The general power of partners in ordinary trading partnerships and the restrictions upon such powers appear to us to be stated with great accuracy by Mr. Justice Story in his treatises on Partnership, and on Agency, and we willingly adopt his language. In the latter of these works Chap. VI, Sections 124 and 125, the law is thus stated. Section 124: Every partner is in contemplation of law, the general and accredited agent of the partnership; or, as it is sometimes expressed, each partner is proepositus negotis socielatis; and may, consequently, bind all the other partners by his acts, in all matters which are within the scope and objects of the partnership. Hence, if the partnership be of a general commercial nature, he may pledge or sell the partnership property; he may buy goods on account of the partnership; he may borrow money, contract debts, and pay debts on account of the partnership; he may draw, make, sign, indorse, accept, transfer, negotiate, and procure to be discounted promissory notes, bills of exchange, cheques and other negotiable paper, in the name and on account of the partnership (Section 125). The restrictions of this implied authority of partners to bind the partnership are apparent from what has been already stated. Each partner is an agent only in and for the business of the firm: and, therefore his acts beyond that business will not bind the firm. Neither will his acts done in violation of his duty to the firm, bind it, when the other party to the transaction is cognizant of, or co-operates in, such breach of duty.
That in ordinary trading partnerships, the power of borrowing money for partnership purposes exists, and that bills or notes given by one of the partners in the partnership firm, for money so borrowed will bind the firm, is too clear to require any authority. It is treated as clear law from the case law of Lane v. Williams (1892) 2 Vern 277 to that of Thicknesse v. Bromilow (1832) 2 Cromp. & Jr. 425.
7. It has been argued that the deed of partnership, dated the 28th June, 1920, contained clauses which brought the case within the exception to Section 251 of the Indian Contract Act.
8. Our attention has been specially drawn to Clauses 4 and 6. Clause (4) provides ' that the entire capital of the said work is of the first party.' Clause (6) provides 'that the first party shall supply all funds required for the purpose of carrying on and completing the work already in hand or any new work in the said sub-division that may be given to the second party by the B.N. Ry. Co.'
9. We are of opinion that these clauses have not the restrictive effect attributed to them. There are, besides, materials on the record to show that the second defendant who had advanced the capital at one stage, declined after a time, to find the necessary funds and thus rendered it necessary for the first defendant to raise money in order that his obligations to the B.N. Ry. Co. might be fulfilled.
10. We need not consequently rely upon the theory favoured in Paterson v. Ganda sequi (1812) 15 East. 62; namely that the case of 'a dormant principal may be assimilated 6o that of a dormant partner, where, though the party furnishing goods to ostensible partners intended at the time, to give credit only to them, yet he may afterwards pursue his remedy against that dormant partner when discovered. A dormant partner is sued on the ground of agency; he is liable on a contract relating to the firm made in the ostensible partner's name alone, because he is taken to have adopted the name of the ostensible partner as his own for the purpose of such contracts, so that, when the ostensible partner signs his name to such contracts, he signs a word, the meaning of which comprehends not himself alone, but his partner also.' This doctrine does not assist us in the solution of the questions involved in this case. Here the problem to be explored is whether the loans were taken by the first defendant in his capacity as partner, and the difficulty is increased where, as in the case before us, the borrower who is a partner in one concern has in hand at the same time various other businesses in which he has no partners. The substance of the matter is that the plaintiffs are not en-titled to succeed merely upon proof that the moneys taken from them by the first defendant were in whole or in part applied for the benefit of the partnership concern; the liability of the second defendant as his partner extends only to sums borrowed by him in his capacity as a member of the firm. We may usefully recall here passages from two well-known cases.
11. In Nicholson v. Ricketts (1860) 2 Rll. & 2 Rll. 497, Cockburn, C.J., observed as follows: 'In order that one member of a partnership may bind another, by drawing or accepting a bill, he must have authority either express or implied by law, so to do. In ordinary cases of commercial partnership, there is no need of express authority, the law implying an authority from the fact that the drawing and accepting bills is part of the ordinary course of such a partnership. So again, in partnership not strictly commercial, if it is obvious from the nature of the partnership or from the particular purpose to which the bills are to be applied, that the drawing of bills is essential, there also, the law implies an authority to each partner to draw them.'
12. To the same effect is the observation of Cleasby, B., in Holme v. Hammond (1872) 7 Ex. Ch. 218. 'In the common case of a partnership, where by the terms of the partnership, all the capital is supplied by A and the business is to be carried on by B and C in their own names, it being a stipulation in the contract that A shall not appear in the business or interfere in its management, that he shall neither buy nor sell, nor draw nor accept bills, no one would say that, as among themselves there was any agency of each one for the other. If, indeed, a mere dormant partner were known to be a partner, and the limitation of his authority were not known, he might be able to draw bills and give orders for goods which would bind his co-partners, but, in the ordinary case this would not be so, and he would not in the slightest degree be in the position of an agent for them.'
13. We are not unmindful of the decision of Wills, J., in Watteau v. Femwick (1891) 1 Q.B. 346, where it is said that in the case of a dormant partner it is clear that no limitation of authority as between the dormant and active partner will avail the dormant partner as to things within the ordinary authority of a partner. In that case, the defendants were the undisclosed principals of a hotel manager who had in fact: no authority to buy any goods (except a limited class for the use of the business) from anyone but the defendants themselves. The plaintiff gave credit to the manager alone and supplied goods not within the excepted class. In these circumstances, Wills, J., held, with the concurrence of Coleridge, C.J., that the defendants were liable for all acts of the manager which were within the usual apparent authority of an agent conducting that kind of business, notwithstanding that the plaintiff supposed himself to be dealing with a principal. The objection that in-such a case there is no holding out at all and therefore no question of apparent authority was met by the analogy of a, dormant partner. But the question remains, is a dormant partner liable merely because he is an undisclosed principal? Is it not rather because he is, by the partnership contract, liable to the same extent as the known partners? The decision in Edmunds v. Bushsll (1865) 1 Q.B. 97 equally open to doubt, and the dictum of Wills, J., in Watteau v. Fenwick (1891) 1 Q.B. 346 was in fact doubted by Lord Lindley in his classical treatise on Partnership. It is further worthy of note that though the case was followed in Kinahan & Co., Limited v. Parry (1910) 2 K.B. 389, the decision in the latter case was reversed on appeal on the ground that there was no evidence to show the existence of any agency in fact; Kinahan v. Parry (1911) 1 K.B. 459. It is plain that the view taken by Wills, J. is not in conformity with Section 5 of the Partnership Act, 1890, which is only declaratory of the previous law.
14. The terms of that section may be usefully re-called here: 'Every partner is an agent of the firm and his other partners for the purpose of business of the partnership; and the acts of every partner, who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.'
15. It is thus clear that the ultimate use by a firm, of money borrowed by a partner individually on his own credit does not make the firm liable for the loan. The circumstance that the firm obtains the benefit of a transaction entered into by one of its members, as pointed out by Rolfe, B. in Beckham v. Drake (1841) 9 M. and W. 99 may show that he entered into the contract as the agent of the firm. But the fact is no more than evidence that this was the case: and the question upon which the liability or non-liability of the firm depends is not whether the firm obtained the benefit of the contract, but did the firm by one of its partners or otherwise enter into the contract. Illustrations of this doctrine are furnished by the decision in Emly v. Lye (1812) 15 East 7, Bevan v. Lewis (1827) 1 Sim. 376, Smith v. Craven(1831) 1 C. and J. 500, Hawtayne v. Bourne (1841) 7 M. and W. 595, Burmester v. Norris (1851) 6 Ex. 796, Ricketts v. Bennett (1847) 4 C.B. 686, Re: Worcester Corn Exchange Co. (1853) 3 De. G.M.L.G. 180 and Fisher v. Tayler (1843) 2 Hare 218.
16. In all these cases the firm got the benefit of the money borrowed and yet was held not liable to re-pay it. It was ruled in substance that the firm had not entered into any contract, express or implied, with the person dealing with the partner in question and did not incur any obligation towards that person by reason of the circumstance that it got the benefit of what he had done. The principle was applied by the Supreme Court of Canada in Shaw v. Cadwell (1889) 17 Sup. Ct. Can. 357; there it was ruled that where one member of a partnership borrows money upon his own credit by giving his own promissory note for the sum so borrowed, and he afterwards uses the proceeds of the note in the partnership business, of his own free will, without being under any obligation to or contract with the lender so to do, the partnership is not liable for the loan. This fundamental principle has been over-looked by Court below. The case has not been approached from the correct standpoint, and it is consequently impossible for us to pronounce judgment on the record.
17. The result is that the decree of the Subordinate Judge, in so far as it dismisses the suit against the second defendant, must be discharged and the case remanded to him for re-trial against that defendant on the lines indicated. The parties will be at liberty to adduce fresh evidence. As the plaintiffs are in a large measure responsible for the course the trial took, they must pay the second defendant Rs. 300 on account of costs in this Court. The costs in the lower Court will be in the discretion of that Court.
18. This judgment will not affect the decree obtained by the plaintiffs against the first defendant.