Doctrine of holding out links itself back to the Partnership Act of 1980. This Doctrine has been incorporated under section 28(1) of the Partnership Act which states that if any one who by words written or spoken or by his conduct knowingly represents himself as the partner in the firm will be liable to anyone who has given credit to the firm on such false representation, whether the person does or does not know that his representation has reached the person granting credit.
When a partner is dead and the firm is continuing in the old firm name, the continued use of the deceased partner’s name as a part thereof shall not make his estate or his legal representatives liable for any act of the firm done after his death.
If a person induces some other to do an act which he would not have done otherwise, then the person making such representation is not allowed to deny the fact that he asserted earlier, is what law of estoppel is. Whereas, Doctrine of holding out is just a branch of law of estoppel.
Essential elements of Doctrine of Holding Out
The two essential elements of doctrine of Holding out are as follows:-
- Knowledge of Representation
Representation- It should be noted that the person charged with the liability must have represented himself to be a partner at the firm. Again the representation can be made through words written or spoken or by his conduct. The implication is not necessary but there should be a representation on the individual’s part.
Knowledge of Representation- Now for the second essential element of doctrine of holding out is that the person making the representation must have full or complete knowledge of his actions. The plaintiff who is making the defendant liable must have knowledge of the representation and has acted on it in good faith. To make the defendant liable it is necessary to prove that either he himself has represented or he by his act or conduct makes a person think that he too is a partner in the firm. If the plaintiff after such a representation believes him and acts in good faith then the fact that defendant knows it or does not knows it becomes immaterial and he can be charged and will be liable to the plaintiff. On the other hand if the plaintiff does not know or has not heard of any such representation or if heard but does not believe it to be true then the defendant cannot be held liable.
Exceptions to the rule of Holding out
The main three exceptions to the rule of holding out are:-
- Deceased partner
- Insolvent partner
- Dormant partner
Deceased partner- Principle of Holding Out does not apply to a deceased partner. Deceased partner is the one who is not alive anymore or is dead. This is because a death in itself is a notification that a person is no more or not longer exists and has ceased to be a partner and therefore cannot be sued.
Insolvent partner- Insolvency of a partner in itself is a notice as well and does not require any public notification. On the date of which a partner becomes insolvent he automatically ceases to be a partner and hence is no longer liable for any of the contracts or transactions made by other partners after his insolvency.
A Dormant partner is the one who does not take active participation in the firm and is usually referred to as a sleeping partner. He is the one who does not take part in the conduct of the firm. Neither the customers nor the clients know about his role or his participation in particular. He just shares profits and losses in the firm. Such a partner if remains dormant for a long time then after his retirement no public notice is needed to prevent him form the liability of holding out. In case his existence was known to few customers then a notice should be provided to them otherwise he will be held liable for holding out.
Difference between Holding out and Law of Estoppel under Partnership
There is a great similarity between the doctrine of holding out and law of estoppel but there consists of few differences as well. A partner in case of law of estoppel represents himself as the partner of the business firm and hence later on he cannot escape from the liability who acted on their representation. On the other hand in case of doctrine of holding out it is the firm who allows the person to misrepresent himself and make the third party believe in such a fact. As explained above there are certain exceptions to the rule of holding out but in case of law of estoppel there are no such exceptions to the rule.
- If Mr. X directly tells A that he is a partner at KLM Co. Ltd. When in fact he is not the partner. This will amount to direct representation and will be held liable.
- If Mr. X allows Z to include his name in the title of the firm and let it be X and Z associates and represents himself to be a partner when in fact he is not, he will be held liable by the third party for such a false representation.
In Ram Coomar vs. M.C. Queen
It was held by the privy council that Mrs. Donalds was the owner of the business and all the transfers that took place holds validity. This was the marked as the foundation of doctrine of holding out.
Scarf vs. Jardine
There was a firm which consisted of two partners Scarfand Rodgers. When scarf retired Beach joined the firm. No new notice was given out to the customers of the change and the business was carried out under the old name. Jardine was an old supplier to the company. Just like always goods were ordered and he supplied them without knowing the change. The firm failed to pay. When he sued the company or the firm for the price he came to know about the change. He then sued the new firm when the firm got bankrupt, he thought of taking an action against the retired partner. It was held that he had lost his right to proceed against the retired partner.