- 3 mins read
What is the meaning of ‘goodwill’? That was the question before the Court of Appeal in a recent case concerning a share purchase agreement.
In 2013, the Triumph Group, a manufacturer of aircraft components, bought two aerospace manufacturing companies from Primus International Holding Company for a purchase price of $76.5 million.
The share purchase agreement included a warranty that a set of financial forecasts provided by Primus, known as the long-range plan, had been ‘honestly and carefully prepared’. According to the long-range plan, the target companies, while loss-making at the time of the sale, would be profitable in the future.
As matters turned out, the subsequent performance of the target companies was poor, there were major operational problems, and Triumph had to inject $85 million to keep the companies afloat.
Triumph brought proceedings against Primus for breach of warranty. Primus resisted the claim on the grounds that the share purchase agreement included a provision excluding liability ‘to the extent that . . . the matter to which the claim relates . . . is in respect of lost goodwill’. The judge in the High Court found for Triumph, and Primus appealed.
Triumph argued that ‘goodwill’ meant ‘the good name, business reputation and connections of a business’. Since the claim related to the carelessly produced long-range plan, rather than lost business reputation, it was not excluded.
Primus contended for an accounting definition of goodwill, namely ‘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’. This would have excluded Triumph’s claim.
Giving judgment in the Court of Appeal, Coulson LJ, with whom Carr and Henderson LJJ agreed, had little hesitation in preferring Triumph’s interpretation.
The ordinary legal meaning of ‘goodwill’ is not friendliness, or a desire to help, but relates to a business’s good name: the ‘established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold’, according to the definition in the Oxford English Dictionary. The term was used in this way in the relevant case law, and elsewhere in the share purchase agreement.
Perhaps most tellingly, if the accounting definition of ‘goodwill’ put forward by Primus had been correct, all claims for breach of the warranty relating to the long-range plan would have been excluded. That could not be a commercially sensible construction, because it would deprive the warranty of any value.
Primus’s appeal was accordingly dismissed, leaving it liable to pay damages for breach of warranty of some $4.2 million, calculated as the reduced purchase price Triumph would have paid if the long-range plan had disclosed the target companies’ true position (less a deductible of $1.5 million).
This case explains the difference between the ordinary legal meaning of ‘goodwill’ and the technical accounting definition. More generally, it serves as a reminder that, if a term is intended to bear a technical meaning in an agreement, it is best to define it explicitly.
Click to view the judgment.
For more information on the article above contact Brendan Biggs.