Q.In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.

• A partnership can be carried on by all or any one partner acting for all.
• Each partner is therefore both a principal and an agent — an agent because his acts bind the other partners and the firm, and a principal because he too is bound by the acts of the other partners.
• So a trade agreement entered into by one partner in the course of business binds all the partners.

The form: partnership

The form of organisation in which a trade agreement made by one owner is binding on the other owners is the partnership firm. This is one of the defining features of a partnership and marks it out from other forms.

The reason: mutual agency

• Business carried on by all or any one: In a partnership, the business may be carried on by all the partners or by any one of them acting for all. The partners do not each have to be present for the firm to act.
• Each partner is both principal and agent: Because of this, every partner is at the same time a principal and an agent:
  • He is an agent because, when he deals with outsiders in the course of business, his acts bind the other partners and the firm.
  • He is a principal because he too is bound by the acts of the other partners.
• Result: A trade agreement entered into by one partner in the ordinary course of the firm's business is therefore binding on all the other partners, whether or not they personally took part in making it.

Why this feature exists

This mutual agency is what allows a partnership to function smoothly, with any partner able to transact on the firm's behalf. It is also why partners must trust one another and why an unwise agreement by one partner can affect them all — a natural consequence of each partner being able to bind the rest.