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The legal meaning of 'goodwill' considered by the English Courts in Primus International Holding Co v Triumph Controls

UK Ltd [2020] EWCA Civ 1228v

The Court of Appeal unanimously upheld the High Court's decision confirming the ordinary legal meaning of 'goodwill' was applied in the context of a contractual construction on the exclusion of liability clause in a SPA for lost 'goodwill'.

Background

The Triumph companies (the Claimants) bought a breach of warranty claim against Primus (the Defendants) purporting that the Defendants failed to provide adequate financial forecasts in what was referred to as the "Long Range Plan" (LRP).

Following completion of the acquisition, the Claimants discovered significant issues in the target companies which led to a downturn in their financial performance. The Claimants fell short of the forecasted earnings stipulated within the LRP.

High Court

Consequently, a claim was brought in August 2015. The Claimants alleged the Defendants breached the warranties given under the SPA. The High Court held the LRP had clearly failed to take key operational and financial assumptions into consideration, overstating the company's profitability.

The High Court held that the Defendants were in breach of warranty and the exclusion of claims 'in respect of goodwill' was not engaged and could not be relied upon by the Defendants.

The Defendants appealed on several matters but were only granted permission to appeal in respect of the true meaning and effect of the 'goodwill' exclusion clause.

Court of Appeal

Primus argued that the exclusion clause within the SPA stipulated "to the extent that…the matter to which the claim relates…is in respect of lost goodwill" and held that the legal meaning of 'goodwill' in a commercial context meant the business' good name, reputation, and connections. The Court of Appeal agreed with this interpretation. Furthermore, the Court of Appeal went further and examined how 'goodwill' was construed throughout the SPA to ensure consistency with the ordinary legal meaning.

The outcome

Finally, the Court of Appeal held that the breach of warranty claim was not covered by the 'goodwill' exclusion. The Claimants did not bring a claim for damage caused to its business name, reputation, or connections; therefore, the exclusion did not engage in a breach of warranty.

This decision highlights the courts reluctance to depart from the ordinary/general meaning of words and utilising other technical definitions e.g. accounting definitions, when interpreting contractual provisions.

Key points to note:

• Drafting Agreements - use precise and clear language when drafting exclusion clauses and contracts.
• True meaning of terms - provide guidance within contracts for competing meanings in order to avoid any conflicts between ordinary legal definitions and technical definitions.
• Warranty claims - to minimise any claims, carefully consider and be wary about giving warranties.

For more information contact David Filmer in our Corporate department via email or phone on 0333 207 1132. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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