Legal tips for Chinese businesspeople in Australia

Asia &amp, China Desk: 05 November 2020

Topic 1: Goodwill and Sale of Business

China »

Goodwill is not a foreign concept for China. As defined in the Contemporary Chinese Dictionary (Xian Dai Han Yu Ci Dian), goodwill means the reputation of a business in Chinese, the same meaning as in English.

However, goodwill is not a legal term under Chinese law. It is not recognised as property, and nor can it be transferred as part of assets in a sale of a business.

Consequently, the purchaser of a business, to preserve the goodwill of the business, needs to have a clause in the contract to specifically assign the contracts and assets they consider necessary and important to keep going the business.

Without such assignments in place, the goodwill may vanish during the transfer and the purchaser may be left with a dead business without proper remedies available.

Australia »

In contrast, under Australian law, common law recognises goodwill as an indispensable part of a business. It is identified as a property, and it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it.

So, a contract for the sale of the goodwill of a business will ordinarily transfer to the purchaser all those matters and things essential to the existence of the goodwill unless the terms of the contract or the surrounding circumstances indicate otherwise.

What is essential to the existence of the goodwill is a matter of fact, which may leave great room for lawyers to argue. But they surely include business name, premises of the business, clients lists etc.

Therefore, if a purchaser fails to include a clause in the contract of sale to assign all customer contracts, the purchaser may rely on the goodwill he purchased to claim that the customers contracts are part of goodwill and that the vendor is obliged to take reasonable effort to assign those contracts.