Home > What is the meaning of “good will”? The Court of Appeal continue the debate

What is the meaning of “good will”? The Court of Appeal continue the debate

4th November 2020

What is the meaning of “good will”?  The Court of Appeal continue the debate

In Primus International Holding Company & Ors v Triumph Controls – UK Ltd & Anor [2020] EWCA Civ 1228, the Court of Appeal grappled with the proper interpretation of “goodwill” in a commercial contract, considering the natural meaning of “goodwill” in the commercial context and the definition prevalent in accounting practice.  The case provides a useful reminder of the approach taken by the courts when construing contracts, highlighting the need for parties to spell out clearly their intended meaning of a term in their contractual agreement if they wish to depart from its ordinary and natural meaning.

Background

This appeal arose in the context of a Share Purchase Agreement (the “SPA”) entered into by the parties in March 2013.  Pursuant to its terms, the Appellant (“Primus”) agreed to sell to the Respondent (“Triumph”) shares in certain aerospace companies (the “Companies”).  The main issue before the court was the true construction of an exclusion clause in the following terms (the “Clause”):

“3.1 No Claim…shall be admissible and the Sellers shall not be liable in respect thereof to the extent that…

(f) The matter to which the claim relates:

(i) Is in respect of lost goodwill…”

In August 2015, Triumph commenced the present proceedings for breach of warranties given by Primus in the SPA, alleging specifically that Primus was in breach of its warrantied obligation to prepare its post-SPA financial forecasts “honestly and carefully”.  The consequence, Triumph argued, was that Triumph had paid more than the true value of Primus’ shares. Primus in turn sought to limit or exclude liability, relying on the Clause.

The Rival Interpretations of the Clause

Before Mrs Justice O’Farrell DBE (the “TCC Judge”) at first instance, Triumph alleged that “goodwill” meant the good name, business reputation and connections of a business and that, since its claims were for overpayment as a result of the careless forecast, the exclusion Clause did not apply.

Primus, on the other hand, submitted that “goodwill” carried a more technical meaning, as follows:

“an intangible asset recorded when a company acquires another company and the purchase price is greater than the sum of the fair value of the identifiable tangible and intangible assets acquired and the liabilities that were assumed” (para. 17).

At first instance, the TCC Judge preferred the construction contended for by Triumph, which maintained that construction in the present appeal.  At the appeal hearing, Primus submitted a slightly different construction, namely, that goodwill was:

“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.”

It was agreed on appeal that both constructions submitted by Primus were essentially an accounting definition, for which it relied (among other things) on a report prepared by accounting firm PwC.

The Court of Appeal

Coulson LJ (with whom Henderson and Carr LJJ agreed) began by considering the ordinary legal meaning of goodwill by reference to Foaminol Laboratories Ltd v British Artid Plastics Ltd [1941] 2 All ER 393.  That case, unusually, did not concern ‘goodwill’ in the ordinary legal sense but what ‘goodwill’ was not, namely, a “sense of friendliness and a desire to help.”  At 399C-E, Hallett J stated that the case thus concerned:

….not the loss of the goodwill of the public…[but] a loss quite different from the loss of goodwill in the legal sense which results when a butcher sells bad meat, or when a vendor of another kind sells poisonous ice cream, because the goodwill there damaged or destroyed is goodwill in the sense of the probability that the customers will resort once more to the same source of supply.

Coulson LJ thus noted Hallett J had considered that, in a commercial context, the ordinary legal meaning of goodwill is the good name and public reputation of the business concerned. Coulson LJ continued that ‘goodwill’ in the legal sense was similarly defined by the Oxford English Dictionary as the “established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold” and at Volume 80 (2013) of Halsbury’s Laws of England at 807:

“The goodwill of a business is the whole advantage of the reputation and connection formed with customers together with the circumstances, whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to customers which the name and reputation possesses.”

The Authorities

Coulson LJ then considered the authorities.  Austen v Boys (1858) 2 De G & J 626 was an early case concerning a claim on retirement for a share of the goodwill in a solicitor’s practice, from which Coulson LJ extracted two main principles: (i)  goodwill relates to the local reputation of the business in question, and therefore the chance to carry it on in that same location; (ii) there is a distinction between goodwill and value or, at the very least, the two are not necessarily interchangeable.

The best-known case as to the meaning of ‘goodwill,’ however, was IRC v Muller and Co’s Margarine Limited [1901] AC 217. At 223, 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. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyze goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such.”

Accordingly, Coulson LJ concluded that “it could not be suggested that  the somewhat convoluted” construction advanced by Primus was the same as the ordinary legal meaning of goodwill.  Although some cases cited to the court demonstrated a tension between the commercial and accounting definitions of ‘goodwill’, Coulson LJ  saw no reason to depart from that ordinary legal meaning when construing the Clause, given that Primus had not contended that there was anything in the circumstances which specifically justified the adoption of an accounting definition.

As, therefore, Coulson LJ considered that present case concerned at heart a claim for overpayment as a result of negligently prepared financial forecasts, and not a claim for loss of share value, Coulson LJ concluded that liability was not excluded by the Clause.

Accordingly, the appeal was dismissed.

Commentary

This case gives a useful reminder of the legal meaning of ‘goodwill’ in a commercial context and highlights certain practical points for contractual drafting and interpretation.  Given that the rival definitions of ‘goodwill’ essentially drew upon (i) accounting practice on the one hand and (ii) the ordinary legal definition in the commercial context on the other, it is worth noting a court will not depart from the ordinary legal meaning of a term unless justified by the ordinary principles of contractual interpretation laid down by the Supreme Court in a number of well-rehearsed decisions.  If, therefore, the parties to a contract intend to give a term in their agreement an unusual, technical, or non-legal meaning, in the words of Coulson LJ at [26] in this case, “that must be spelt out.”

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Sally Wollaston
Sally Wollaston
Business Development and Marketing Director
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