True Test of a Partnership

The true test of a partnership is a way for us to determine whether a group or

association of persons is a partnership firm or not. It also helps us recognize the
partners of the firm and separate them from the third parties. The idea behind
such a true test is to examine the relevant facts and determine the real relations
between parties and conclude about the presence of a partnership. Let us take a
look at the three important aspects of a true test of a partnership, namely

agreement, profit sharing and mutual agency.

1] Agreement/Contract between Parties

For there to be a partnership between two or more persons there has to be an

agreement of partnership between them. The partnership cannot arise family
status or any operation of law. There has to be a specific agreement between the
partners.

So if family members of a HUF are running a business together this is not a

partnership. Because there is no agreement of partnership between them. The
members of HUF are born into the HUF, so they cannot be partners.

2] Profit Sharing

Sharing of profits is an aspect of the true test of a partnership. However, profit

sharing is only a prima facie evidence of a partnership. The Act does not consider
profit sharing as a conclusive evidence of a partnership. This is because there are
cases of profit sharing that are still contradictory to a partnership. Let us see some
such cases Sharing of profits/ gross receipts from a property that two or more
persons own together or have a joint interest in is not a partnership.

A share of profits given to an agent or servant does not make him a partner. If a
share of the profit is given to a widow or child of a deceased partner does not
make them partners. Part of the profits shared with the previous owner as a part
of goodwill or as a form of consideration will not make him a partner. Now
ascertaining this motive becomes difficult if there is no express agreement
between the concerned parties. In such a case we will consider the cumulative
effect of all relevant facts. This will help us to determine the true relationship
between the parties.

3] Mutual Agency

This is the truest test of a partnership, it I the cardinal principle of a partnership.

So if a partner is both the principle as well as an agent of the firm we can say that
mutual agency exists. This means that the actions of any partner/s will bind all the
other partners as well. So whenever there is confusion about the existence of a
partnership between people we check for the presence of a mutual agency. If
such an agency exists between the parties who run a business together and share
profits it will be deemed that a partnership exists.
REVOCATION OF CONTINUING GUARANTEE

1. By notice of revocation –

Section 130 of the Act provides that a continuing guarantee may at any time be revoked by the
surety, as to future transactions, by notice to the creditor.

Examples ‘A’, in consideration of B’s discounting, at A’s request, bills of exchange for ‘C’,
guarantees to ‘B’, for 12 months, the due payment of all such bills to the extent of Rs. 5,000. ‘B’
discounts bills for ‘C’ to the extent of Rs. 2,000. Afterwards, at the end of 3 months, ‘A’ revokes
the guarantee. This revocation discharges ‘A’ from all liability to ‘B’ for any subsequent
discount. But ‘A’ is liable to ‘B’ for Rs. 2,000, on default of ‘C’. • ‘A’ guarantees to ‘B’, to the
extent of Rs. 10,000, that ‘C’ shall pay all the bills that ‘B’ shall draw upon him. ‘B’ draws upon
‘C’. ‘C’ accepts the bill. ‘A’ gives notice of revocation. ‘C’ dishonors the bill at maturity. ‘A’ is
liable upon his guarantee.

2. By surety’s death •

Section 131 of the Act provides for revocation of continuing guarantee by surety’s death. It
states that the death of the surety operates, in the absence of any contract to the contrary, as a
revocation of a continuing guarantee, so far as regards future transactions.

The estate of deceased surety is liable for those transactions taken place during lifetime of the
surety to the creditor.

Surety’s estate will not be liable for the transactions that took place after the death of surety even
though the creditor has no knowledge about surety’s death.
3. By variation in terms of contract •

Section 133 of the Act provides for discharge of surety by variance in terms of contract. It states
that any variance, made without the surety’s consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to transactions subsequent (after) to the
variance. (but surety is liable to transactions before the variance made)

EXAMPLE • ‘A’ becomes surety to ‘C’ for B’s conduct as a manager in C’s bank. Afterwards,
‘B’ and ‘C’ contract, without A’s consent, that B’s salary shall be raised, and that he shall
become liable for 1/4 th of the losses on overdrafts. ‘B’ allows a customer to overdraw, and the
bank loses a sum of money. ‘A’ is discharged from his suretyship by the variance made without
his consent, and is not liable to make good this loss.

4. By release or discharge of principal debtor –

Section 134 of the Act provides for discharge of surety by release or discharge of principal
debtor. It states that the surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released, or by any act or omission of the
creditor, the legal consequence of which is the discharge of the principal debtor.

EXAMPLE • (a) ‘A’ gives a guarantee to ‘B’ for goods to be supplied by ‘C’ to ‘B’. ‘C’ supplies
goods to ‘B’, and afterwards ‘B’ becomes embarrassed and contracts with his creditors
(including ‘C’) to assign to them his property in consideration of their releasing him from their
demands. Here B is released from his debt by the contract with ‘C’, and ‘A’ is discharged from
his suretyship.

(b) P contracts with C for a fixed price to build a house for C within a stipulated time, C
supplying the necessary timber. S guarantees P's performance of the contract. C omits to supply
the timber. S is discharged from his suretyship.

(c) P contracts with C to grow a crop of indigo on his (Ps) land, and to deliver it to Cat a fixed
rate. S guarantees P's performance of this contract. C diverts a stream of water which is
necessary for irrigation of Ps land and thereby prevents him from raising the indigo. S is no
longer liable on his guarantee.
5. By composition or compounding by creditor with principal debtor, extension of time
and agreement not to sue •

Section 135 of the Act provides for the discharge of surety when creditor compounds with, gives
time to, or agrees not to sue, principal debtor. It states that a contract between the creditor and
the principal debtor, by which the creditor makes a composition with, or promises to give time
to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such
contract.

6. By creditor’s act or omissions impairing surety’s eventual remedy •

Section 139 of the Act provides for discharge of surety by creditor’s act or omission impairing
surety’s eventual remedy. It states that if the creditor does any act which is inconsistent with the
rights of the surety, or omits to do any act which his duty to the surety requires him to do, and
the eventual remedy of the surety himself against the principal debtor is thereby impaired, the
surety is discharged.

EXAMPLE • ‘B’ contracts to build a ship for ‘C’ for a given sum, to be paid by instalments as
the work reaches certain stages. ‘A’ becomes surety to ‘C’ for B’s due performance of the
contract. ‘C’, without the knowledge of ‘A’, prepays to ‘B’ the last two instalments. ‘A’ is
discharged by this prepayment.

7. Loss of security under contract •

Section 141 of the Act provides for Surety’s right to benefit of creditor’s securities. It states that
a surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of suretyship is entered into, whether the surety knows of
the existence of such security or not; and if the creditor loses, or, without the consent of the
surety, parts with such security, the surety is discharged to the extent of the value of the security.
EXAMPLE • ‘C’, advances to ‘B’, his tenant, Rs. 2,000 on the guarantee of ‘A’. ‘C’ has also a
further security for the Rs. 2,000 by a mortgage of B’s furniture. ‘C’ cancels the mortgage. ‘B’
becomes insolvent and ‘C’ sues ‘A’ on his guarantee. ‘A’ is discharged from liability to the
amount of the value of the furniture.
8. By misrepresentation •

Section 142 of the Act provides for guarantee obtained by misrepresentation invalid. It states
that any guarantee which has been obtained by means of misrepresentation made by the creditor,
or with his knowledge and assent, concerning a material part of the transaction, is invalid.

9. By concealment •

Section 143 of the Act provides for Guarantee obtained by concealment invalid. It states that any
guarantee which the creditor has obtained by means of keeping silence as to material
circumstances, is invalid.

EXAMPLE • ‘A’ engages ‘B’ as clerk to collect money for him. ‘B’ fails to account for some of
his receipts, and ‘A’ in consequence calls upon him to furnish security for his duly accounting.
‘C’ gives his guarantee for B’s duly accounting. ‘A’ does not acquaint ‘C’ with B’s previous
conduct. ‘B’ afterwards makes default. The guarantee is invalid.
Particular lien.
A particular lien is one which is available to the bailee against only those
goods in respect of which he has rendered some service involving the
exercise of labour or skill.

Examples
(a) A delivers a rough diamond to B, a jeweller, to be cut and polished.
This is accordingly done. B is entitled to retain the finished diamond till
he is paid for services he has rendered. (b) A gives a piece of cloth to B,
a tailor, to make into a coat. B promises A to deliver the coat as soon as
it is finished. B is entitled to retain the coat till he is paid for.

Sec. 170 explains 'particular lien' as follows: "Where the bailee has, in
accordance with the purpose of the bailment, rendered any service
involving the exercise of labour or skill in respect of the goods bailed, he
has, in the absence of a contract to the contrary, a right to retain such
goods until he receives due remuneration for the services he has
rendered in respect of them".

Simply stated, particular lien is available to a bailee only against those

goods on which some skill and labour have been expended by him. But
if the bailee does not complete the work within the agreed time, or a
reasonable time, he cannot exercise his right of lien. Also, if he
voluntarily permits the bailor to regain possession of the goods without
payment of the charges, he cannot exercise the right of lien. Same is the
case when he allows credit to the bailor.
Example. A gives a piece of cloth to B, a tailor, to sew it into a coat. B
promises A to deliver the coat as soon as it is finished, and to give A
three months' credit for the price. B is not entitled to retain the coat.

If, through no fault of the bailee, the goods are destroyed or stolen, the
bailee is entitled to be paid for services performed upon the goods before
they were destroyed or stolen.

Example. A, a watch-repairer, repaired B's watch for a total charge of

20. Before B took delivery of the watch, the shop caught fire through no
fault of A, and B's watch was destroyed. A is entitled to get his repair
charges for the work he performed prior to fire.
Duty to take reasonable care[1]:
Section 151 of the Contract Act provides that the bailee is under
obligation to take care of the goods bailed to him as an ordinarily
prudent man in his place would have taken under the similar situation.
This means that the duty laid down by this section is general and
uniform in nature. This section does not provide for any exceptional
situations; rather it covers all the contracts of bailment. In Giblin v.
McMullen[2], the court pointed out that “a gratuitous bailee is bound to
take the same care of property entrusted to him as a reasonable, prudent
and careful man may fairly be expected to take his property of the
similar description.”[3] Therefore, the bailee is bound to take reasonable
care whether the bailment is gratuitous or non-gratuitous. Additionally,
the obligation of a bailee includes not only the duty to take all
reasonable precautions to obviate the risks but also the duty of taking all
proper measures for the protection of the goods when such risks had
already occurred.[4] parcel11

The parties under the contract of bailment may insert any special
provision increasing the responsibility of the bailee in respect of care to
be taken against the goods bailed, but they cannot decrease the standard
of care. Section 152, in this regard clearly states that one has to fulfill
the requirement of reasonable care mentioned in Section 151 even if the
contract has any special provision. The standard of duty cannot be
reduced, as it would be unfair if bailee is not held liable for his
negligence of not taking standard care. Even where he has contracted
himself out of liability due to his negligence, the bailee has still to show
that he took as much care of the pledged goods as an ordinarily prudent
man as required by Section 151.[5]
In Sheik Mohamed v. the British Indian Steam Navigation Co. Ltd.[6]
The case, it was pointed out that a bailee’s liability cannot be reduced by
any provision which is under the limit provided in Section 151; also it
was held that any such contract which results in complete exclusion of
bailee from liability in case of his negligent act is not valid.

In certain situations the standard of care of care is increased the i.e.,

special degree of care is required to be fulfilled. In Pitt Son and Badgery
Ltd v Proulefco SA[7], a wool broker sold wool but retained it in his
store. The store was wooden, old and surrounded by a fence with gaps
large enough for a person to enter. The wool was destroyed in the fire
caused by an intruder who entered through the gaps, and set light to the
store from outside. It was held that the broker, as a bailee, was
responsible for the loss; he was in breach of duty because the fence was
insufficiently secure to keep out intruders.

Duty not to make any unauthorized use:

In a contract of bailment, the bailor transfers the goods to the bailee for
some purpose, and the bailee is responsible for using the goods bailed
according to the purpose of bailment. Section 154 of Indian Contract Act
imposes liability on bailee if goods are not used authoritatively. Using
goods beyond the conditions of a contract would make the bailee liable
to bailor if due to such unauthorized act the bailor has suffered any loss
or if goods are damaged. This implies that the bailee is not entitled to
use the goods for personal benefits (unless the bailment for his use) by
doing an unauthorized act. Even if the goods bailed are for his personal
use, he is not authorized to let the goods be used by another person.
Nevertheless, if the situation requires, the bailee may use these goods for
preservation.[8] But in the other circumstances, he is required to have
express or implied consent of the bailor to use the goods against the
conditions of bailment contract.

Duty not to mix or part with the goods:

The bailee has to take certainly reasonable care while dealing with the
goods of the bailor. One such responsibility includes his duty not to mix
the bailor’s goods with his own or part of the goods. According to
Section 155, if the bailee has mixed the goods with his goods and while
doing so he had the prior consent of the bailor, then the bailor will have
interest over the goods in proportion to the goods he has bailed. But this
section specifically states that the bailee had the consent of bailor.

Section 156 and 157 speaks about the conditions wherein the bailor’s
consent was not there while mixing the goods. In those situations
wherein the goods are separable, the law imposes liability on the bailee
for any loss or damage that the bailor might suffer due to such mixing.
But if it is not possible to separate the goods, the bailor is entitled to
claim reimbursement for the loss of goods.