Q.What is meant by 'partner by estoppel'? Explain.

• Such a person does not contribute capital and does not manage the firm, but by his behaviour or conduct he gives others the impression that he is a partner.
• On the strength of that impression, if outsiders extend credit to the firm, he becomes liable to those creditors as if he were a genuine partner. …

Meaning

The word 'estoppel' refers to being stopped (prevented) from denying something you have led others to believe. A partner by estoppel is a person who, through his own conduct or behaviour, gives other people the impression that he is a partner in a firm. Because he created that impression, the law will not later allow him to deny being a partner — he is estopped, and so becomes liable to those who relied on the impression.

Key points

• He is not really a partner: He neither contributes capital to the firm nor takes part in managing it.
• Liability arises from conduct: His liability comes purely from his behaviour that made outsiders believe he was a partner.
• Liable to third parties: If, on the strength of that belief, outsiders extend credit to the firm, he becomes liable for repaying that debt just like a genuine partner.

Example

Suppose Rani is not a partner in the firm Simplex Solutions. She accompanies a partner, Seema, to a business meeting and there actively negotiates a deal in a way that makes the outsiders believe she too is a partner. Relying on this belief, the outsiders extend credit to the firm. Because Rani's own conduct created the impression of partnership, she becomes liable to repay that debt as though she were actually a partner — that is, she is a partner by estoppel.

How it differs from a nearby idea …