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Exclusion Clauses: The Meaning of “Lost Goodwill”

Published on 15 January 2021

What is the meaning of “goodwill” in the context of a contractual limitation of liability clause?

The key takeaway 

“Goodwill” in contracts for the sale of a business should be given its ordinary legal meaning of “a type of proprietary right representing the reputation, good name and connection of a business”. 
The ordinary legal meaning of “goodwill” is not the same as the accounting definition (which considers “goodwill” in the context of share value). If a party intends to attribute an unusual or technical meaning to a particular term which differs from its ordinary legal meaning, that should be clearly spelt out in the terms of the agreement.

The background 


In 2013, Primus and Triumph entered into a Share Purchase Agreement (SPA) for the sale to Triumph of two aerospace manufacturing companies owned by Primus for USD$76 million. At the time of sale, both companies were loss-making but financial forecasts provided to Triumph by Primus (and warranted in the SPA as being “honestly and carefully prepared”) projected future profitability. However, following completion, Triumph discovered significant operational and business issues within the companies. They failed to achieve the earnings forecasted and Triumph had to invest USD$85 million to keep them afloat.

In August 2015 Triumph brought a damages claim against Primus alleging that the financial forecasts warranty had been breached. Primus sought to rely on an exclusion in the SPA that excluded liability “to the extent that […] the matter to which the claim relates […] is in respect of lost goodwill”. 

At first instance, the Court concluded that Primus was in breach of the warranty. There was no appeal of that decision. Triumph was awarded damages to reflect the USD$15 million difference between what Triumph actually paid for the companies and the lower purchase price they would have paid had the forecasts been properly prepared. 

The Court also held that the loss arising from the breach was not “lost goodwill”. The correct construction of “goodwill” was the ordinary legal meaning, not the accounting definition that Primus sought to rely on. The loss arising from the breach was for lost revenues and increased costs. Primus appealed that point.

The decision 


The Court of Appeal unanimously dismissed Primus’ appeal, agreeing that the correct construction of “loss of goodwill” in the exclusion clause related to loss of business reputation. The claim was not excluded as it was not “a claim for loss of share value: it was a claim for overpayment as a result of the careless [financial forecasts]. The loss was the difference between the price actually paid, and the lower price which Triumph would have paid if they had known the true position”.
The Court of Appeal also set out several useful observations: 

  • The ordinary legal meaning of “goodwill” is not the same as the accounting definition – the ordinary legal meaning is not synonymous with “value”.
  • The use of “goodwill” in other parts of the SPA was consistent with its ordinary legal meaning (for example, the non-compete covenants which were intended to protect reputation).
  • Previous case law “overwhelmingly” supported the conclusion that “goodwill” in contracts for the sale of a business refers to “a type of proprietary right representing the reputation, good name and connections of a business” rather than any other technical meaning. 

Why is this important? 

The English courts are generally reluctant to depart from the ordinary meaning of words used in contracts and will not ascribe an alternative definition (in this case, a technical accounting definition of “goodwill”) unless there is good reason to do so.


Any practical tips? 


This case reiterates the need for specific and clear language in contracts, particularly when attempting to limit or exclude liability. If parties wish to assign a meaning to a term which differs from its ordinary (legal) meaning, this must be spelt that out in the contract as clearly as possible (and used consistently within the contract).