Liability of partners to third parties in a partnership
One of the major legal risks in running a business through a partnership is that partners can become personally liable not only for their own conduct, but also for the conduct of the other partners. That is because a partnership is built on the principle of mutual agency. In broad terms, each partner may act on behalf of the firm and, in doing so, may bind the other partners, and the result is that liability to third parties can arise even where an innocent partner had no direct involvement in the transaction or wrongdoing.
Under the Partnership Act 1958 (Vic) (the Act) partner liability to third parties generally falls into two categories: liability for debts and contractual obligations, and liability for wrongs, such as negligence or other misconduct.
Liability for debts and contractual obligations
Section 13 of the Partnership Act 1958 (Vic) provides that every partner is jointly liable with the other partners for the debts and obligations of the firm incurred while they are a partner. In practical terms, this means partners themselves may be personally exposed. This is one of the most significant features of a partnership structure, and a creditor dealing with the firm may ultimately have recourse against the partners personally if the partnership cannot meet its obligations.
The reason this liability arises is closely tied to s 9 of the Act, which provides that every partner is an agent of the firm and the other partners for the purposes of the partnership business. If a partner acts in the usual course of the firm’s business, that act may bind the firm and the other partners, even if they were not personally involved.
Section 9 reflects the common law principle of mutual agency and operates through two familiar concepts: actual authority and ostensible authority. Actual authority arises where the partner truly has authority to act on behalf of the firm, whether expressly or impliedly. Ostensible authority, on the other hand, may arise where the partner appears to a third party to have authority, even if their actual authority has been limited internally. This distinction is important.
Liability for wrongful acts
The position becomes even more serious where liability arises from wrongful acts rather than contractual obligations. Sections 14 to 17 of the Act deal with partnership liability for wrongs committed by a partner.
Section 14 provides that where a partner, acting in the ordinary course of the business of the firm or with the authority of their co-partners, causes loss or injury to a person who is not a partner, the firm is liable for that wrong.
Section 16 goes further and provides that every partner is liable jointly with the other partners and also severally for that liability. This means an injured third party may be able to pursue one partner alone for the full amount, leaving that partner to sort out contribution issues internally.
This is a particularly important distinction, as whilst liability for debts under section 13 is joint, liability for wrongs under section 16 is joint and several, creating a much broader exposure for partners.
Why this matters
For businesses operating as partnerships, these provisions highlight the importance of choosing partners carefully and having clear internal arrangements about authority, decision-making, and risk management. Even so, internal agreements do not always prevent liability to outsiders. From a third-party perspective, the legislation provides commercial certainty.
The importance of a strong partnership agreement
A good partnership agreement is one of the best ways to reduce risk and avoid problems later on. Whilst the law sets some default rules, a written agreement lets partners clearly decide how the business will operate. It should explain each partner’s role, how decisions are made, how profits and losses are shared, what happens if a new partner joins or someone leaves, and how disputes will be handled. It is also important to clearly set out what each partner is allowed to do, as this helps prevent one partner from making unauthorised decisions that could bind the whole firm and make everyone liable. As the business grows, the agreement should also be reviewed and updated, so it continues to reflect how the partnership works in practice.
A strong agreement helps protect both the business and the partners themselves.
Final thoughts
Partnerships can be flexible and commercially useful, but they carry significant personal risk. The statutory regime makes clear that partners may be liable for partnership debts, contractual commitments, and even wrongful acts committed by other partners in the course of the business. For that reason, anyone entering into a partnership should understand that the relationship is not only one of shared profit, but also shared legal responsibility.
At Warlows Legal, we advise partners and business owners on structuring partnerships and managing risk. With a team dedicated to help you with your commercial needs, we can help you put in place strong partnership agreements and governance frameworks. See our legal services we offer for corporate and commercial law here.
