Partnership Agreement: The Default Rules That Apply If You Don't Write Your Own

A partnership deed is not legally mandatory in India; a partnership can exist on an oral agreement, and courts will still recognise it. But an oral or vague agreement doesn't create a gap where nothing applies. The Indian Partnership Act, 1932 fills every silence with a default rule, and several of these defaults genuinely surprise partners who assumed something different applied to their situation.

If your deed is silent, here's exactly what applies instead

Section 13 of the Act sets out what happens when a written deed doesn't address a specific point, and these are worth knowing precisely, because "we never really discussed it" is a common way partnerships end up here without realising it:

• Profit and loss sharing: if the deed doesn't specify a ratio, profits and losses are shared equally among partners, regardless of how much capital each one actually contributed. A partner who put in 80% of the capital and assumed a proportionate share, without it being written down, gets an equal share by default, not a proportionate one.
• Interest on capital: if the deed is silent, no interest is payable on a partner's capital contribution at all.
• Interest on drawings: similarly, if silent, no interest is charged on amounts a partner withdraws.
• Interest on a partner's loan to the firm: this is the most commonly surprising one. If a partner advances a loan to the firm beyond their agreed capital contribution, and the deed doesn't address the interest rate, the Act sets it at 6% per annum by default, whether or not the firm intended to pay interest on that advance at all.

What a properly drafted deed should cover

1. Firm name and business address, and the nature of the business itself.
2. Capital contribution from each partner, and whether interest is payable on it (overriding the no-interest default if that's not what's intended).
3. Profit and loss sharing ratio, stated explicitly rather than left to the default equal-share rule.
4. Roles, duties and decision-making authority of each partner, including which decisions need unanimous consent versus a simple majority.
5. Admission of new partners: the process and consent required.
6. Retirement, expulsion, and death of a partner: notice requirements, how the outgoing partner's share is valued and settled, and whether the firm continues (a survivorship clause) or dissolves by default on a partner's death.
7. Dispute resolution mechanism, commonly arbitration, since litigation between partners is slow and can be genuinely damaging to an ongoing business relationship even where the underlying dispute is resolved.

The retirement trap: liability doesn't end when the partner leaves

Under Section 32 of the Act, a retiring partner continues to be liable to third parties for the firm's acts done before retirement, and in fact remains liable for the firm's acts even after retirement, until public notice of the retirement is actually given. This genuinely catches people out: simply leaving the firm and stopping active involvement does not, by itself, end exposure to the firm's future dealings with third parties who don't know the partner has left. The deed should specify who is responsible for giving this public notice and how, and a retiring partner has real reason to insist on it being done properly rather than assuming it's automatic.

Expulsion must be provided for, and done in good faith

A partner cannot simply be expelled by majority vote unless the partnership deed specifically provides for expulsion and sets out the grounds. Even where the deed does provide for it, under Section 33, the expulsion must be exercised in good faith and not arbitrarily; an expulsion that fails either test can be challenged and set aside.

Registration is optional, but the cost of skipping it is real

Registering a partnership firm with the Registrar of Firms is not compulsory under the Act. But Section 69 sets out a real consequence for staying unregistered: an unregistered firm cannot bring a legal action against a third party to enforce a right arising from a contract, and cannot file a set-off in a suit brought against it by a third party. This means an unregistered firm can genuinely find itself unable to sue a customer or supplier who owes it money, purely because of the registration status, regardless of how clear-cut the underlying claim is.