Goodwill - what's in a word?
It's easy with hindsight to see how a word with more than one possible interpretation may result in a dispute. A recent Court of Appeal decision serves as a helpful reminder to ensure that your contracts are clear if you want to be certain that a particular interpretation will be applied.
In Primus International Holding Company v Triumph Controls UK Ltd  EWCA Civ 1228, the Court of Appeal had to consider the meaning of goodwill in an acquisition agreement, pursuant to which a warranty claim had been brought.
The case concerned a sale to Triumph of two aerospace manufacturing companies for circa $76 million. The share purchase agreement (SPA) included a warranty regarding a business plan which included financial forecasts. Following the sale, there were significant business issues with the companies and they failed to achieve their financial forecasts. Consequently, Triumph injected $85 million to keep the companies going.
Triumph claimed that a warranty stating that certain business forecasts had been "honestly and carefully prepared" had been breached. Primus's defence was that, even if the warranty had been breached, the SPA excluded liability "to the extent that…the matter to which the claim relates… is in respect of lost goodwill", and that any losses were excluded as a result.
Primus's argument was that goodwill should be interpreted as "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." In effect, Primus was seeking to apply an accounting definition to the term "goodwill", the consequence of which was that the loss could not be claimed as the value of the claim did not relate to an identifiable asset.
Triumph, on the other hand, asserted that goodwill meant "the good name, business reputation and connections of a business" and that as the claim was not for lost business reputation, the exclusion clause did not apply.
The court agreed with Triumph's interpretation. This was on the basis that:
- There was no reason to depart from the ordinary legal meaning of "goodwill". Importantly, the SPA didn't spell out a different intention.
- Existing legal authorities point to goodwill being given its ordinary legal meaning. The authorities considered didn’t point to a technical meaning being applied.
- Other parts of the SPA, such as certain undertakings, used goodwill in its ordinary legal sense. Courts will ordinarily assume that language is used consistently.
- If the technical interpretation sought by Primus was applied, then any loss which didn’t relate to the value of a particular asset couldn’t be claimed. This would have taken away a significant amount of protection which the warranties would otherwise provide, without any clear wording showing that was the intention of the parties.
The key points to take from this case are:
- Use clear language and be consistent with its use. This is all the more important if you're seeking to exclude your liability.
- If you want to use specific technical words, particularly in the context of specialist sectors or industries with their own terminology, make it clear in the contract itself that it is the technical meaning which should apply.
Daniel Bryan is a Senior Associate in the Corporate team.
This note reflects our opinion and views as of 26 October 2020 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.