Interpretation of “goodwill” leads to a reduction to the purchase price of company by USD5.7 million
What is the meaning of “goodwill” in the context of a share purchase? Ask an accountant and you may be told that it relates to the difference in value between a company’s assets and liabilities and the price paid for that company. Whereas a lawyer may explain that “goodwill” means the good name, reputation and business connections of a company.
What is important, however, as illustrated in the Court of Appeal case (upholding the decision in the High Court) Primus International Holding Company v Triumph Controls – UK Limited  EWCA Civ 1228, is to ensure that terms are clearly defined.
In Primus the buyer, Triumph, had brought a claim against the seller, Primus, for breach of a warranty. Primus contended that the warranty claim was subject to a limitation of liability clause which excluded loss where the claim related to “lost goodwill”. “Goodwill” was not defined in the limitation clause, and when Triumph claimed breach of contract, Primus defended that claim (among other grounds) based on its claimed interpretation of “goodwill”.
The judge found in favour of Triumph and determined that the purchase price be reduced by USD5.7 million.
The case is a reminder of the significance of clearly defining terms when drafting or advising on Share Purchase Agreements and ensuring that clauses purporting to limit liability are precise.
We regularly assist clients in drafting legal documents and ensure that the terms used are clear and precise to avoid issues around interpretation from arising.