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Court of Appeal confirms that "goodwill" will, in the absence of clear words to the contrary, be given its ordinary legal meaning

Overview

In Primus International Holding Company & Ors v Triumph Controls – UK Limited & Ors,1 the Court of Appeal has confirmed that, unless there are clear words to the contrary in a contract, the ordinary legal meaning of a particular term (in this case, "goodwill") will be preferred to an unusual or non-legal meaning.

Factual background

In 2013 the parties entered into an SPA for the USD 76.5 million sale to Triumph of two aerospace manufacturing companies owned by Primus. The SPA contained a warranty that certain financial forecasts provided by Primus for the companies, referred to as the "Long Range Plan" (the "LRP"), had been "honestly and carefully prepared". Following completion, Triumph discovered significant operational and business issues within the companies; they failed to achieve the earnings forecasted in the LRP and as a result had to inject USD 85 million to keep the companies afloat. 

Triumph brought a damages claim against Primus, alleging breach of the above warranty. Primus sought to rely, inter alia, on paragraph 3.1(f)(i) of Schedule 8 of the SPA (the "Goodwill Exclusion") which excluded liability "to the extent that […] the matter to which the claim relates […] is in respect of lost goodwill".

The High Court rejected Primus' argument, stating that "the plain and natural meaning of goodwill in a commercial contract is business reputation", the losses sustained by Triumph are lost revenues and increased costs, and therefore the Goodwill Exclusion does not exclude the claims. Primus, having been held to have breached the relevant warranty and unable to rely on the Goodwill Exclusion, were ultimately ordered to pay damages in the sum of USD 4,201,570 (to reflect, inter alia, the lower purchase price which would have been paid by Triumph had the LRP been properly prepared).   

Decision

Primus sought permission to appeal on a wide range of matters, including the judge's calculation of quantum, but was refused permission on all but the true meaning and effect of the Goodwill Exclusion.

On appeal, Triumph maintained its submission that "goodwill" meant the good name, business reputation and connections of a business, and that since its claims were for overpayment due to the careless LRP, and not for lost business reputation, the Goodwill Exclusion did not apply. By contrast, Primus argued that "goodwill" should be interpreted by reference to the accounting definition, broadly: "a loss of share value, where that value represents the difference between the cost of acquisition and the fair value of its identifiable net assets and/or where that loss of share value is caused by the impairment of the value of non-identifiable assets".

The Court of Appeal upheld the decision at first instance, supported by the following observations:

  • It was clear that the judge (at first instance) gave the word "goodwill" its ordinary legal meaning in a commercial context, and that she was right to do so. The Court of Appeal confirmed that "If a contract contains a term to which the parties intend to give an unusual or technical or non-legal meaning, that must be spelt out. That did not happen here."

  • The authorities point "overwhelmingly" to the conclusion that "goodwill" in a contract for the sale of a business refers to "a type of proprietary right representing the reputation, good name and connections of a business, and is different from the particular or specific meaning attributed to the term by accountants".

  • It was clear that the term "goodwill" was used in other parts of the SPA in a way that was consistent with its ordinary legal meaning. This comment by the Court of Appeal serves as a helpful reminder of the importance placed on the use of the relevant wording elsewhere within the four corners of any agreement when approaching contractual interpretation, and the expectation that such wording will be used consistently. 

  • If Primus was correct in its construction of the term "goodwill", it would mean that any claim for breach of warranty not relating to existing assets would be covered by this broad definition of "goodwill" and would therefore fall foul of the Goodwill Exclusion. Triumph would be deprived of most of the force and protection of the SPA warranties without any express words to that effect. In the words of Briggs LJ in Nobahar Cookson and Another v Hut Group Ltd2: "the parties are not likely to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words to that effect".

Comment

This decision helpfully clarifies that the term "goodwill" will usually be considered to mean the good name, business reputation and connections of a business.

The clear take-away is that if parties wish to ascribe a different meaning to "goodwill" – whether that be an unusual, technical or non-legal meaning – they must spell that out in the relevant documentation as clearly and unequivocally as possible. 

 

1[2020] EWCA Civ 1228 

2[2016] EWCA Civ 128

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