Relations of Partners to Third Parties: Partner is an Agent of the Firm

A partner is an agent of the firm. This means that a partner has the authority to bind the firm to contracts with third parties.

The authority of a partner to bind the firm is called “apparent authority.” Apparent authority is created when a partner acts in a way that a reasonable third party would believe that the partner has the authority to act.

The apparent authority of a partner can be limited by the partnership agreement. However, if a third party deals with the firm in good faith and without knowledge of the limitation on the partner’s authority, the third party can still hold the firm liable.

Here are some MCQs on the relations of partners to third parties: partner is an agent of the firm:

  1. Which of the following is true about the authority of a partner?
    • A partner has the authority to bind the firm to contracts with third parties.
    • The authority of a partner can be limited by the partnership agreement.
    • A third party can hold the firm liable for a contract made by a partner even if the partner did not have the authority to make the contract.
    • All of the above.
    • The answer is (d). All of the above are true about the authority of a partner.
  2. A partner in a banking partnership makes a contract with a third party without the authority to do so. Is the firm liable for the contract?
    • Yes, the firm is liable for the contract.
    • No, the firm is not liable for the contract.
    • The answer is (a). The firm is liable for the contract even if the partner did not have the authority to make the contract, as long as the third party dealt with the firm in good faith and without knowledge of the limitation on the partner’s authority.
  3. A partnership agreement limits the authority of a partner to make contracts for amounts over $10,000. A partner makes a contract for $15,000 with a third party. Is the firm liable for the contract?
    • Yes, the firm is liable for the contract.
    • No, the firm is not liable for the contract.
    • The answer is (b). The firm is not liable for the contract, as the third party knew that the partner did not have the authority to make contracts for amounts over $10,000.