Partnership; liability of a partnership for the acts of its agents; liability for fraudulent acts of an agent.
Facts: Lloyd owned two cottages which produced a rental income. She also received interest on a sum of money she had loaned out. However, Lloyd was not satisfied with the income she was getting from these assets. She went to Grace, Smith & Co (GS), a firm of solicitors, for advice.
She was advised by GS’ managing clerk Sandles, who was responsible, without supervision, for the firm’s conveyancing. Sandles advised Lloyd to sell both of her cottages and call in the loan of her money, so that the funds could be reinvested. He induced her to sign papers that gave him the power to carry out these transactions. He then dishonestly disposed of Lloyd’s property for his own benefit. Lloyd sued GS to recover the value of her assets, basing her claim on the firm’s liability for the fraudulent acts of its agent, Sandles. GS denied liability for the acts on the basis that they had not been carried out for the benefit of the firm.
Issue: Is a partnership liable for acts of its agents even where those acts were fraudulent and not carried out for the benefit of the firm?
Decision: In the circumstances, the managing clerk was clothed with an apparent authority to represent GS. A partnership is liable, as principal, for the fraud of an agent acting within the scope of their actual or apparent authority, whether or not the fraud is committed for the benefit of the partnership.
Reason: Lord MacNaghten said (at 738):
"Mr Smith [of GS] carries on business under a style or firm which implies that unnamed persons are, or may be, included in its members. Sandles [the managing clerk] speaks and acts as if he were one of the firm. … Who is to suffer for this man's fraud? The person who relied upon Mr Smith's accredited representative or Mr Smith, who put this rogue in his own place and clothed him with his own authority?
If Sandles had been a partner in fact, Mr Smith would have been liable for the fraud of Sandles as his agent. It is a hardship to be liable for the fraud of your partner. But that is the law under the Partnership Act."