08 December 2020

If in doubt, spell it out! You can never be too careful when drafting legal agreements

This article series was written by Barri Mendelsohn (Partner), Jenny Willcock (Senior Associate), Daniel Jones (Trainee Solicitor) and Jennifer Reyes Au (Trainee Solicitor) in the KWM London office.

Executive Summary

The Full English afficionados amongst you will recall that we originally covered the UK High Court’s ruling on Primus International Holding Company v Triumph Controls UK Ltd [2020] EWCA Civ 1228 in our review of 2019 cases - please see [here] for further details. Key findings were made with regard to notification of warranty claims, fair disclosure and forward-looking projections.

The case was heard before the UK courts again in September this year, with the Court of Appeal rejecting an appeal from Primus International Holding Company (“Primus”) against the High Court’s interpretation of the meaning of “goodwill” in a share purchase agreement between Primus and Triumph Controls UK Limited (“Triumph”). It confirmed that “goodwill” should be given its ordinary legal meaning (i.e. business reputation), rejecting Primus’ argument that it should mean share value.

As ever, the Court of Appeal’s decision highlights the need to take great care when drafting exclusion clauses and warranties in transactional documents. UK courts will not read technical meanings into words that have otherwise normal and ordinary meanings attached to them – if companies intend for words to be given technical meanings, these should be stated expressly in the relevant legal agreements. 

Facts

The key facts of the original case are set out below:

  • Triumph, a multinational aerospace and defence manufacturer, bought the entire issued share capital of three subsidiaries specialising in the manufacturing of composite components for the aerospace industry (the “Targets”) from Primus, a multinational manufacturer of complex aircraft components, pursuant to the terms of a share purchase agreement dated 27 March 2013 (the “SPA”). 

  • The value in the Targets was derived from their future profitability, which was partly dependent on the transfer of operations from the UK to Thailand.  

  • Due to delays in such transfers and the UK subsidiary losing its “NADCAP” industry accreditation, the Targets suffered a significant shortfall in revenue resulting in Triumph bringing a claim for damages of approximately $63.5m against Primus in which a number of warranty breaches were alleged. 

High Court ruling

For the purposes of the appeal case, the key decision of the High Court to highlight was the awarding of $4.2 million in damages to Triumph due to a breach of warranty by Primus that the forecast had been honestly and carefully prepared. 

Primus had argued that the exclusion clause in the SPA excluded liability to the extent that the claim related to a matter “in respect of lost goodwill”. Primus argued that the loss of “goodwill” meant a loss of share value, and so the exclusion clause prohibited Triumph from bringing a claim for breach of warranty. 

The High Court, however, found that there had been a breach of warranty and that the exclusion clause had not affected the claim, noting that “goodwill” should be given its natural and ordinary meaning in commercial contracts (i.e. business reputation). Primus appealed this interpretation. 

Court of Appeal ruling

The Court of Appeal, in rejecting the appeal and upholding the High Court’s original interpretation, reaffirmed that “goodwill” should be given its usual legal meaning as established in UK case law, i.e. the benefit and advantage of the good name, reputation and connection of the business concerned. It also noted that if Primus had intended the exclusion clause to have an unusual or technical meaning, then this should have been spelt out in the SPA. 

Primus had hoped to rely on the meaning of “goodwill” found in accountancy practices, but again the Court of Appeal found that if this was the intended meaning, then it should have been expressly stated in the SPA, notwithstanding the fact that experts for both parties agreed that there was no goodwill recorded on the balance sheets at the time of the sale. The terms of the SPA also prohibited Primus employees from working for Triumph for two years after the sale – as a result, it did not make sense to the court that goodwill should be calculated at the time of the sale. The Court of Appeal also highlighted the fact that Triumph’s claim was for overpayment, not for loss of share value.

The exclusion clause as drafted was therefore to exclude any claim for damages to Triumph’s reputation, good name or business connection (such as if past convictions for money-laundering or corruption on the part of the Targets if they had surfaced post-acquisition). As there had been no such damage suffered, the exclusion clause had not been activated and so the court found that Triumph was within its rights to proceed with its claim. 

Key Lessons

Language is key when it comes to legal drafting and this case highlights how careful parties need to be, particularly when attempting to exclude or limit liability. Whilst the definition of “goodwill” from an accounting perspective is well understood and pivotal when valuing a business, if the term is to be relied upon by parties, the technical (rather than ordinary) meaning of the term must be made clear in the legal agreements. 

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