What happened?

Primus International Holding Company v Triumph Controls UK Ltd [2020] EWCA Civ 1228 concerned an appeal from a previous decision of the High Court concerning claims relating to the sale of two aerospace manufacturing companies by Primus to Triumph. Primus gave various warranties as to the state of the business run by the two companies in the share sale agreement (SPA).

In brief, shortly after acquiring the companies, the financial and operating position of the business deteriorated rapidly. Triumph brought proceedings against Primus for breach of various warranties.

We previously covered the High Court’s decision in a series of three Corporate Law Updates. You can read the background to the claim in our Corporate Law Update from 29 March 2019. (You can read about the other matters in dispute between the parties in our Corporate Law Update from 5 April 2019 and our Corporate Law Update from 12 April 2019.)

Among other things, Triumph claimed that Primus had breached a warranty that certain forward-looking projections – known as the “Long Range Plan” – had been “honestly and carefully prepared”. The High Court judge agreed that the warranty had been breached and awarded Triumph damages.

Primus appealed. It argued that, notwithstanding the breach of warranty, Triumph could not recover its loss because the SPA specifically excluded Primus’ liability for a warranty claim “to the extent that … the matter to which the claim relates … is in respect of lost goodwill”. The loss Triumph had suffered, Primus argued, was solely loss of goodwill.

To decide whether the exclusion applied, the court had to work out the meaning of the word “goodwill” in the SPA.

Primus argued that “goodwill” referred to “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”. This definition derives from accounting standards and effectively reflects the difference between the purchase price and the net asset value.

Because the loss Triumph had suffered was not referable to any particular assets, Primus argued that it must, by definition, be referable to “goodwill” and so was not recoverable.

Triumph, on the other hand, argued that “goodwill” simply meant the “good name, business reputation and connections of a business”, rather than any value over and above the purchase price. The loss suffered was, Triumph argued, referable to forecasted future performance – that is, anticipated revenue streams – rather than name and reputation.

What did the court say?

The court agreed with Triumph’s interpretation.

Essentially, the question before the judges was one of contractual interpretation. The court drew on the principles set out by the Supreme Court in the now well-known trio of cases: Rainy Sky S.A. v Kookmin Bank [2011] UKSC 50, Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24.

However, the judges noted that this case was unusual, because neither Primus nor Triumph had relied on any pre-contract negotiations or other factual context to back up their arguments. The court therefore had to examine the language of the SPA alone to determine the parties’ intentions.

The judges gave several reasons for preferring Triumph’s interpretation:

• The ordinary legal meaning of the word “goodwill” is the good name and public reputation of the business concerned. There was no reason for the court to depart from that ordinary meaning in this particular case. If Primus and Triumph had intended to use a technical accounting definition, they would have spelled that out, but they hadn’t.
• This interpretation was backed up by previous court decisions, which had concluded that goodwill included the “benefit and advantage of the good name, reputation and connection of a business”, as well as an “agreed absence from competition”. None of those authorities pointed towards the technical, accounting sense of the word.
• Other parts of the SPA used the term “goodwill” to refer to the companies’ name, reputation and business connection. This was particularly apparent in the non-compete covenants in the SPA, which were intended to protect that reputation.
• Those covenants also referred to future as well as present value, which was inconsistent with an accounting term that would require the business to be valued at the date of the sale. If “goodwill” meant only the value on sale, there would have been no need for covenants protecting goodwill in the future.
• Perhaps most convincingly, the court noted that several warranties in the SPA did not refer to the value of assets, such as those concerning the accuracy of the companies’ registers and compliance with licences. If Primus’ interpretation of “goodwill” had been correct, all claims would have been excluded except those relating to the value of identifiable assets. This would have neutered several warranties, or at least have required them to be phrased very differently.

As a result, the exclusion did not apply and Triumph’s claim was preserved.

What does this mean for me?

This is another salutary warning to contract parties to use specific language, particularly when attempting to limit or exclude liability. If there is any ambiguity, the courts will always construe a limitation or exclusion clause against the party who is seeking to benefit from it (“contra proferentem”).

In our experience, it is not common for a seller to succeed in excluding liability for any lost goodwill on a share sale. This will have done little to help Primus’ case, as there is little or no precedent for interpreting the term in the context of a limitation of liability in connection with a share sale.

The interpretation Primus had argued for was based on well-trodden principles. The accounting sense of “goodwill” is widely understood and plays an important role when valuing a business that is being bought or sold. But it should not be assumed that this definition will automatically track across into a commercial contract. Fatally for Primus’ case, applying the accounting definition in this case would effectively have nullified many of Triumph’s protections in the SPA, which made no commercial sense.