Story Case

Charles Thompson and Raymon Riley were partners, dealing in automobiles. Thompson was the experienced man of the two, and it was agreed between them that Riley should never purchase an automobile when his partner was not in the store. Nevertheless, one day when Thompson was not present, Riley was impressed with the value of a machine which he was certain the firm would lose if the purchase was not made at that moment. Therefore, he contracted for the purchase of the automobile. Later, Thompson refused to abide by this contract, saying that Riley had not any authority to make such a purchase for the firm. The vendor maintained that, since he acted in good faith not knowing of the limitation on Riley, and since Riley was doing the ordinary firm business, it was bound on the contract. Is he right?

Ruling Court Case. Bank Of The United States Vs. Winship, Volume 5 Peters, United States, Page 552

John Winship, Amos Binney and John Binney entered into a partnership for the purpose of manufacturing and selling soap under the firm name of "John Winship.", John Winship, by their agreement, was to be the general manager of the business. By special agreement, however, it was provided that he should wholly abstain from becoming the surety or indorser of any person. But notwithstanding this limitation upon his power, he did indorse several promissory notes. This was an action by the Bank of the United States upon some of these notes so signed by Winship, seeking to charge the Binneys on them as partners. It was contended by the Binneys that they should not be held as partners of Winship upon these notes, because it was expressly provided that he was to have no authority to bind the firm by indorsing promissory notes. By the bank it was claimed that such limitations were not valid as against them, because notice thereof had never been made to them of such limitations.

Decision

The relation of partnership is governed by the same principles which govern the relation of principal and agent. Each partner has implied power to bind the firm by acts within the scope of the partnership business. Since this is true, secret limitations upon the authority of a partner, although binding as between the partners, has no effect upon third persons who act in good faith in dealing with such partners and have no notice of his limited authority.

Chief Justice Marshall said: "A partner, certainly an acting partner, has power to transact the whole business of the firm, whatever that may be, and consequently, to bind his partners in such transactions as entirely as himself. This is a general power, essential of a partnership. When, then, a partnership is formed for a particular purpose, it is understood to be in itself a grant of power to the acting members of the company to transact its business in the usual way. If that business be to buy and sell, then the individual buys and sells for the company, and every person with whom he trades in the way of its business has a right to consider him as the company, whoever may compose it. It is usual to buy and sell on credit; and, if it be so, the partner who purchases on credit in the name of the firm must bind the firm." Accordingly, it was held that the bank could recover on the note in question.

Ruling Law. Story Case Answer

The right of one partner to act for and to bind the firm by his acts and contracts is based upon the principles of agency. By virtue of the partnership agreement, implied authority is conferred upon each partner to act for the firm within the scope of the partnership business. As between the partners, just as between a principal and his agent, any agreement may be made as to the power of each partner, or limitations may be imposed upon the authority of each partner and such agreements and limitations will be chiding as between themselves; but they have no effect upon third persons who deal with a partner in ignorance of such agreements and limitations. In the Story Case, therefore, the firm was bound because Riley was doing ordinary partnership business, which, apparently, he had the right to do.