Zajac v. Harris
1967 Ark. LEXIS 1343, 241 Ark. 737, 410 S.W.2d 593 (1967)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A business association is a partnership if the parties' intent, as inferred from their conduct such as sharing profits and contributing capital, indicates a partnership relationship, even without a written agreement and regardless of how one party unilaterally characterizes the relationship for tax or accounting purposes.
Facts:
- Carl A. Zajac conducted a salvage business, among other enterprises.
- Zajac and George Harris orally agreed to associate in the salvage operation, focusing on buying and reselling wrecked automobiles and their parts.
- Harris borrowed $9,000 and used this personal capital to purchase cars for the business.
- The parties' arrangement involved splitting the profits from the resale of the cars and parts.
- Zajac controlled the business's books and records, with assistance from his wife and an accountant.
- Zajac paid Harris one half of the profits from cars that Zajac bought and sold entirely on his own.
- Harris was unable to read or write, though he could sign his name.
Procedural Posture:
- George Harris filed suit against Carl A. Zajac in an Arkansas chancery court (a court of first instance for equity matters).
- Harris sought to compel Zajac to provide an accounting of the profits and assets of an alleged partnership.
- The chancellor (the trial court judge) found that a partnership existed between the two parties.
- The chancellor referred the case to a master to prepare a statement of the partnership accounts.
- Zajac, as the appellant, appealed the chancellor's decision to the Supreme Court of Arkansas.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a partnership exist where one party contributes significant personal capital, actively participates in the business, and shares in all profits, despite the other party maintaining control of the bookkeeping and treating the first party as an employee for tax and insurance purposes?
Opinions:
Majority - George Rose Smith
Yes. A partnership exists because the totality of the parties' conduct demonstrates an intent to form a partnership, which outweighs unilateral bookkeeping entries suggesting an employer-employee relationship. The court determined that the intent of the parties is the ultimate question. Under the Uniform Partnership Act, Harris's receipt of a share of the net profits serves as prima facie evidence of a partnership. This evidence is substantially strengthened by the fact that Harris also invested significant personal capital ($9,000) in the venture. The court found Zajac's admission that Harris received a share of profits from transactions handled solely by Zajac to be especially compelling, as this is inconsistent with a commission-based employment arrangement. The court discounted the significance of Zajac's accounting practices—such as withholding taxes and carrying workmen's compensation insurance—because they were unilateral actions, and Harris's illiteracy made it unlikely he understood their legal implications.
Analysis:
This case illustrates that courts will look to the substance of a business relationship over its form or label to determine if a partnership exists. It establishes that conduct, particularly profit-sharing combined with capital contributions, is powerful evidence of intent to form a partnership. The decision serves as a precedent that one party's unilateral, formal characterization of the relationship (e.g., as employment for tax purposes) can be overcome by evidence of the parties' actual business practices. This is especially true where one party is unsophisticated and may not comprehend the legal significance of the other's record-keeping.
