Goodwill Hunting

In the case of Primus International Holding Co v Triumph Controls – UK Ltd[1], the courts were left searching for the most appropriate definition of “goodwill” when considering a breach of warranty claim.

Background:

• Primus (the seller) and Triumph (the buyer) entered into a share purchase agreement (SPA) in 2013 for the sale of two aerospace manufacturing companies.  

• In preparation of the sale, the seller produced financial forecasts projecting that, although loss-making at the time of the sale, the companies would be profitable in the future.  The parties agreed the purchase price for the companies based on those forecasts and, under the SPA, the seller provided a warranty that, as far as it was aware, the forecasts had been “honestly and carefully prepared”. 

• Following the sale, the companies failed to achieve the forecasts and the buyer issued proceedings against the seller for breach of warranty, claiming that the financial forecasts had not in fact been honestly and carefully prepared and that, as a result, the buyer had overpaid for the companies.

• The seller sought to rely on a provision in the SPA that excluded liability “to the extent that…the matter to which the claim relates… is in respect of lost goodwill”, arguing that the reference to goodwill should be construed in line with the accounting definition of goodwill so that it meant a loss of share value.

• The buyer, on the other hand, argued that the reference to goodwill in the limitation clause meant the good name, business reputation and connections of a business and that, since it was making a claim for lost revenues and increased costs, leading to reduced profitability and loss of share value – which do not fall within the definition of goodwill asserted by the buyer – the seller’s liability would not be excluded.

Decision:

The Court of Appeal upheld the trial judge’s decision that, on its proper construction, the reference to goodwill was as it had been asserted by the buyer (i.e. the good name, reputation and connection of a business) and that the exclusion of liability for loss of goodwill under the SPA did not apply in this case.

In arriving at their decision, the appeal judges referenced the Oxford English Dictionary definition, as well as citing IRC v Muller and Co’s Margarine Limited[2] in which Lord MacNaghten said:

“What is goodwill? It is a thing very easy to describe, very difficult to define.  It is the benefit and advantage of the good name, reputation, and connection of a business.  It is the attractive force which brings in custom.”

The Court went on to state that: “there is no reason for this court to depart from [the] ordinary legal meaning of the word when construing the … exclusion, or to utilise the accounting definition of the term instead.” and 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.”

In other words, the Court reminds us that, when constructing contracts, if you mean apples make sure you say apples.