Journal of Accountancy

Volume 46 Issue 3 Article 3

9-1928

Goodwill—Definition and Elements in Law

L. L. Briggs

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Briggs, L. L. (1928) "Goodwill—Definition and Elements in Law," Journal of Accountancy: Vol. 46 : Iss. 3 ,
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 Goodwill—Definition and Elements in Law
By L. L. Briggs

With the phenomenal growth of modern business, goodwill has

become a subject of increasing importance. At the present
time this intangible asset is recognized as legal property of vast
extent and of a considerable degree of complication. The legal
aspect of goodwill is vital to members of the accountancy profes­
sion because the court decisions involving the numerous phases of
the asset are used as precedents for subsequent cases with similar
circumstances. Since these precedents are followed by the judges
in their rulings, it is essential that the accountant be familiar with
the decisions rendered in the leading cases. In order to appreciate
these decisions fully, one should have an understanding of the
development of the goodwill concept.
The term goodwill has been in use for centuries. In 1571, an
Englishman wrote the following sentence in making his will: “I
gyve to John Stephens . . . my whole interest and good will of
my quarrel.” This and similar statements found in other records
show that the word was employed in England in various kinds of
documents as early as the sixteenth century.
The earliest legal implication of goodwill is found in an English
court decision dated 1620. This case involved a consideration
paid by the purchaser of the wares of an old shop for the agree­
ment of the vendor not to keep shop in the same vicinity. The
vendor failed to keep his agreement and the purchaser sued him
for damages. The claim of the proprietor against the vendor was
upheld by the court. Although the term was not used in the text
of the decision, it is evident that the vendor sold his goodwill with
the business when he agreed to refrain from keeping shop in that
particular neighborhood. When the contract was made, both
parties, evidently, intended that the buyer should benefit by the
situation of the business and by the friendly attitude and patron­
age of the vendor’s customers. These are some of the essential
elements of goodwill.
While the word goodwill has been used in documents for several
centuries and the concept was implied in an early court decision,
the law of goodwill is of comparatively recent development. The
Burn Dictionary of Law which was published in 1792 does not
mention the subject. From this fact it may be inferred that
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before the 19th century the term was not employed to any great
extent by the legal profession.
The law of goodwill developed earlier in England than in the
United States. The American people adopted the English common
law as it was in 1776 and modified it to suit conditions in this
country. The decisions of the English courts subsequent to that
date have no binding force upon our citizens. Surrogate Fowler
expressed his opinion of the matter in these words: “Goodwill is
one of the matters which our post-revolutionary courts are free to
develop for themselves without reference to the authority of the
older common-law courts. In the department of law, the late
British adjudications have no force.” Even though the English
decisions have no controlling power over the American people, the
fact remains that our judges have quoted English common-law
decisions on goodwill from the time of the first American cases
involving that form of property to the present. The common
laws of the two countries in regard to this subject are in substan­
tial agreement. There are a few minor points in which differ­
ences appear, but, generally speaking, there is no distinct cleavage
between the two.
After 1800, when the extensive industrial progress of England
had resulted in an enormous increase of free capital, the business
units began to increase in size. The factor of goodwill became an
element that could no longer be ignored and it soon became a sub­
ject of litigation. Lord Eldon handed down his much quoted
decision of Cruttwell v. Lye (17 Ves. 335) in 1810, and from that
time to the present English court decisions involving the numer­
ous phases of this intangible form of property have been rendered
by leading jurists of that country.
Analogous industrial changes did not occur in the United States
until nearly half a century later, so American decisions affecting
goodwill do not date further back than 1859 when that of Bucking­
ham v. Waters (14 Cal. 146) was rendered. The number of deci­
sions concerning this form of property slowly began to increase in
England after 1850 and in the United States after 1875, but most
of the English decisions have been rendered subsequent to 1875
and most of the American cases were decided after 1900.
A period of business consolidations in the United States started
in the latter half of the 19th century. In order to facilitate the
formation of large business combinations it was of great impor­
tance to recognize the variations between the proportionate
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earnings of the various constituent concerns and the earn­

ings of the tangible assets contributed to the consolidations.
Consequently, it became necessary to establish a value for the
goodwill. When this value was determined it usually appeared
on the balance-sheet of the consolidation. In some cases it was
merged with the values of the other fixed assets but generally it
was given a separate caption on the financial statement.
The legal concept of goodwill has been constantly expanding to
enable the courts to keep up with the ever increasing complexities
of modern business. Although the law was slow to recognize the
existence of goodwill as a form of property it has been quite free in
making the concept more inclusive. The liberality of the judges
may be due in part to the fact that a broad concept has proved
salutary in effecting just results to the parties concerned in good­
will litigation. Justice Grace says, "The law, as other big insti­
tutions of modern society, is advancing. It has broadened in its
conception of human rights, including property rights. . . .
Goodwill, by reason of the great progress of society, is considered
to be a property right in a good many instances, and under a great
many conditions in which it was formerly held not to apply.”
Jurists do not always agree in their ideas of goodwill. Most of
the judges have treated it as an internal economy, originating in or
adhering to the factors of production. Others have looked upon
it as an external economy in the field of consumption. In many
instances the courts seem to have confused the primary causes of
goodwill, such as efficiency and better products which attract
patronage, with the goodwill itself. Accountants and business
men have closely followed the theories of the courts, but taken as
a whole they have so combined the views of judges and econo­
mists that the concept is growing more complicated.
Although the term goodwill is constantly used by the business
man, the accountant and the attorney, its meaning is not always
clear and its real nature is often misunderstood. The courts of
England and the United States have made many decisions in
which a definition of goodwill has been involved, and the leading
jurists of these countries have admitted that its meaning is not
easy to state. Chief Justice Fuller of the supreme court of the
United States, in speaking of goodwill, made this statement:
“There is difficulty in deciding exactly what is included in the
term.” In an English decision, Jessel, master of the rolls, said:
“. . . but practically, it is difficult to understand what is meant
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by goodwill.” Chelmsford, lord chancellor of England, admitted

that “It is difficult to give any intelligible meaning to the term
goodwill.” Lindley, the author of a standard work on partner­
ship, went so far as to say, “The term goodwill can hardly be said
to have any precise signification.”
Since the meaning of the term is so elusive and seemingly so
difficult for acute legal minds to grasp, the formulation of a suit­
able definition has been a long-drawn-out and laborious task. Sir
John Romilly, master of the rolls, made the following statement
in a decision: “There is considerable difficulty in defining accurately
what is included in the term goodwill.” Justice Cobb has ad­
mitted that “Judges have found no little difficulty in framing a
definition.” Justice Wilkes said, “It is difficult to define what
goodwill is.” When one considers that the concept of this in­
tangible asset has been rapidly broadening during the last century
it is easy to see why the making of an adequate definition for it has
been almost an impossibility.
Many attempts to define goodwill have been made by jurists
and these efforts have varied greatly in wording and meaning.
The word, like many other trade terms, may have different mean­
ings dependent upon circumstances in which it is used and the
purpose for which it is intended. Sir John Romilly has said: “ It
varies in almost every case.” Lord MacNaghten made the state­
ment that “What goodwill means must depend on the character
and nature of the business to which it is attached.” Because the
word has been used in so many different senses, a prominent
writer in the field of business finance has maintained that “It is
almost . . . incapable of definition.” Nevertheless, economists,
accountants and jurists have attempted to define this term and the
definitions made by the leading judges of England and America
will be considered in some detail.
The earliest English legal definition of goodwill is found in the
decision of Cruttwell v. Lye (17 Ves. 335) which was rendered by
Lord Chancellor Eldon in 1810. The importance of this case
justifies a brief outline of the facts. A man having a wagon trade
from Bristol and Bath to London became bankrupt and his busi­
ness with the goodwill was sold. His friends purchased another
carrying business for him. The new route started in Bristol and
Bath but terminated in Warminster and Salisbury. As soon as
the bankrupt was released from the debts of his former business
he started the second one and tried to regain his former customers.
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The buyer sued him in the chancery courts and it became the duty
of the chancellor, Lord Eldon, to state the meaning of goodwill.
This able jurist defined the term in these words: “The goodwill
... is nothing more than the probability that old customers will
resort to the old place.” This is the first definition of goodwill in
the common-law reports and it is one that has been quoted in
decisions by English and by American judges ever since goodwill
has been a subject of litigation. It makes goodwill local and an
incident of the place where the business has been carried on, not
of the persons by whom the concern was conducted. However,
it was not taken so literally as to mean that the customers must
actually come to the old place, but simply that they will continue
their patronage. In that particular place and at that time, the
definition probably was adequate. In fact, Parsons says that it
“. . . is an exact statement of the legal meaning of goodwill.”
The modern business man is aware that the habit of people to
purchase from a certain dealer, which is the foundation for any
expectation that purchases will continue, may depend upon many
things besides place. The doctrine of stare decisis compelled
many judges to attempt to apply Lord Eldon’s definition to cases
in which the conditions were entirely different from those of
Cruttwell v. Lye, with the result that this statement of the meaning
of the term was found wanting. In the days of this great judge,
transportation facilities, as we know them, were undeveloped and
trade was more dependent on place than at present. Conse­
quently, goodwill was supposed to be built up about a certain
locality. After the steamship was perfected and railroads
became common, this narrow conception of place as the source
of goodwill became inadequate to meet the needs of business.
However, Lord Eldon’s definition served as a standard for the
English courts until 1859 when Vice-chancellor Sir W. Page
Wood, after giving a rather liberal interpretation of it, said,
“Goodwill, I apprehend, must mean every advantage, every posi­
tive advantage, if I may so express it, that has been acquired by
the old firm in carrying on its business, whether connected with
the premises with which the business was previously carried on, or
with the name of the late firm, or with any other matter carrying
with it the benefit of the late business.” Vice-chancellor Wood’s
statement expands the goodwill concept so that it includes all that
good disposition customers feel toward the house of business
using a particular name, which persuades them to continue
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to patronize it. As far as English common law is concerned

it is doubtful that this definition has been improved upon
in comprehensiveness. According to Lord MacNaghten, good­
will is “. . . the benefit and advantage of the good name,
reputation, and connections of a business. It is the one thing
which distinguishes an old-established business from a business at
its first start.” This statement is open to criticism on the
grounds that there are attracting forces other than goodwill which
bring in customers and there are things other than goodwill which
differentiate an old-established business from a new one. Lord
Lindley, in the same case, gave a definition which is slightly more
definite than those already discussed. This able English jurist
said, “I understand the word to include whatever adds value to
the business by reason of situation, name, reputation, connection,
introduction to old customers, and the agreed absence of competi­
tion, or any of these things.” Lord Lindley mentions at least two
factors that have been ignored in other definitions, namely,
introduction to old customers and absence of competition.
Many definitions of goodwill have been formulated by
American judges and stated in their decisions and writings. The
definition which is considered most comprehensive and has
been quoted with approval in numerous decisions is that given by
Judge Story in his work on partnership. According to Judge
Story, “Goodwill of a trade or business may be defined as the
advantage or benefit which arises from the establishment of a
particular trade or occupation. The advantage or benefit which
is acquired by an establishment beyond the mere value of the
capital, stock, funds, or property employed therein, in conse­
quence of the general public patronage and the encouragement
which it receives from constant or habitual customers, on account
of its local position, or common celebrity, or reputation for skill or
affluence or punctuality, or from other accidental circumstances or
necessities, or even from ancient partialities or prejudices.” The
statement of Judge Story is more explicit than the English defini­
tions because more of the numerous things that go to create good­
will are mentioned. It has the merit of being fairly specific and
is comprehensive enough to cover almost every conceivable case.
However, it has been severely criticized. Professor Foreman has
discussed it in these words: “Yet broad as this definition is, it is
largely a hasty collection of ideas, without proper citations from
legal opinions. It does not cover the subject of goodwill so as to
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give us a clear idea of its exact nature and contents.” Bates was
less definite but more comprehensive when he said: “Goodwill is
every possible advantage acquired by a firm in carrying on its
business, whether connected with the person or name or other
matter.” There are many other American definitions of goodwill
which might be considered but these may be summarized by the
statement that most of them emphasize the probability of old
customers returning to the old place of business, the chance of
being able to retain the business that has been established, and the
fact that extra profits are gained from these advantages.
The constituent elements of goodwill are many and these ele­
ments vary with the particular business with which the asset is
associated. It is impracticable to discuss them all, so most atten­
tion will be given to those which have been points of litigation in
court cases. Place and firm name have been most often men­
tioned in the decisions, so these elements will be considered in
detail.
From the historical viewpoint, place was the first element of
goodwill to be recognized by the law. It was the only one recog­
nized, as far as the English courts were concerned, until 1859.
All the early definitions of goodwill which were made by various
jurists contain some reference to the advantages accruing to the
vendee from the situation of the old business.
In a case involving a hotel it was decided that the goodwill was
attached to the place. The courts have held that the value of the
lease of a mercantile firm was enhanced by goodwill. Justice
Sieback, in speaking of this intangible asset, said: “ It exists at the
place where the business is carried on.” In Indiana, the courts
have held that goodwill is an incident of locality or place of store­
room or place of business. A Louisiana court ruled that the good­
will of a stall in a public market attached chiefly to the place.
Where goodwill is attached to a locality, it will pass by a con­
veyance of the place of business.
While goodwill is generally local, it is not always so. If it were
it would exist after the business had ceased. This would be an
absurdity. District Judge Holt, in discussing this point, said:
“. . . that does not mean that in all cases there can not be any
goodwill left if the place of business is changed.” There are
decisions to the effect that the practice of a dentist, a mail-order
house and a laundry have goodwill that is not dependent upon
place.
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It is a fact of common observation that locality has little effect

upon the practice of a dentist. Almost any reasonable place
suffices. Few dentists have their offices on the ground floor in the
busiest section of the city. The situation of a mail-order house in
a particular city rarely has any influence on the amount of busi­
ness which it transacts. Most of these concerns are in the out­
lying districts where rents are low. The out-of-the-way situation
is no handicap because the orders come through the mail and
consequently the customer is not required to seek out the place of
business. If a laundry collects and delivers, it would seem that
the site of its buildings would have but little effect upon the
amount of business done and, through this, upon goodwill. The
cash-and-carry laundry would consider situation to be an essen­
tial element in its goodwill.
Firm name ranks next in importance among the several ele­
ments of goodwill. The absence of sanctioning precedent caused
the courts carefully to avoid recognition of this as an element
before 1859. Judge Story, in his Commentaries on the Law of
Partnership, did not include it in his definition of this asset. As
trade grew and expanded it became necessary to recognize
that a firm name might be so used as to become impersonal to
those conducting the business, and indicate the article dealt in.
In such a case it was desirable that the name be considered a part
of the goodwill of the business concerned. It finally became
necessary for the courts to decide the point. Vice-chancellor
Wood rendered a decision in 1859 in which he said: “The firm
name is a very important part of the goodwill of the business car­
ried on by the firm.” The precedent being set, the courts since
1859 have felt free to include the firm name as an element in good­
will. However, there is an American decision of a date as late as
1880 in which the court refused to allow the buyer of a business to
use the firm name of the seller. On the other hand, the firm name
is not necessarily a part of goodwill merely because it is an es­
tablished firm name, and it can not be so regarded if the business
depends upon the personal attributes of the owner.
The fact that a vendee buys a business and its goodwill does not
give him the right to use the name of the vendor. According to
North Dakota Compiled Laws of 1913, section 5466: “The good­
will . . . does not include the right to use the name of any person
from whom it was obtained.” Vice-chancellor Hall, in an Eng­
lish decision, said: “It seems to me that the question whether
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goodwill does ordinarily include the right to use the name of a

living person should receive a general answer, viz., that it does
not.”
It has been ruled that the name under which a business has been
established and carried on can not be the sole constituent of the
goodwill of that business. However, in a case involving a St.
Louis newspaper, Chief Justice Fuller of the United States su­
preme court held that the goodwill wholly attached to its name
rather than to the place of publication.
Personal qualities which attract patronage, may in many cases,
be a very important element of goodwill. The courts have
recognized honesty, politeness, promptness and other personal
characteristics which tend to draw customers to the business
which is so fortunate as to have a management and employees
possessing them. Often they overbalance all other elements of
goodwill. The business which is carried on by people having
these attractive personal qualities often succeeds and develops a
valuable goodwill even though it may have a poor situation and
other disadvantages.
The patronage which may be attracted by favorable personal
qualities may be casual or regular. According to Surrogate
Ketcham, “Whether its customers dealt for cash or not, whether
they were constant or not, furnishes no criterion for a finding as to
whether a business has goodwill. An established and respected
trade which appeals to casual customers, is at least as much the
subject of goodwill as one which caters to a fixed and faithful
number of patrons. The qualities which successfully serve a
fluctuating class of customers coincide peculiarly with the ele­
ments upon which, according to the authorities, goodwill grows
into an asset of calculable value.”
All other things being equal, the concern which has been in
existence over a long period of time is more likely to have a valu­
able goodwill than the business which is trying to get started or
the one which has existed only a few years. The reason for this is
that the effects of favorable and unfavorable characteristics tend
to become cumulative. The young business, even though it may
have many elements which result in goodwill, has not had the
time for them to reflect themselves in the profits to such an extent
that excess profits, which are the criterion of goodwill, result.
Factors which destroy goodwill tend to eliminate the business.
The older business generally is the one which has the qualities
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fitting it to survive and these same qualities are those that

develop goodwill.
In one case on record the licence of a saloon was considered an
element of goodwill. However, licences, patents and franchises
are not usually considered to be elements of this kind of property.
They are intangible assets but they differ from goodwill in that
they are subject to depreciation.
Partialities and prejudices against a concern may be an element
in the goodwill of a competing organization. If a man does not
like the religion or political affiliation of Trader A he is quite cer­
tain, other things being equal, to give his business to Trader B if
the latter belongs to his church and political party. Thus,
prejudice against A served to increase the profits of B with a
resulting increase in any goodwill that B may have.
One judge maintained that goodwill was embodied in a label on
a wrapper. This decision is very unusual and has not been cited
in subsequent cases. A land agent’s book containing the names
and addresses of prospects was held to be the sole element of
goodwill in that particular land business. Perhaps the broadest
statement of the elements of goodwill is that they include all that
goes with a business in excess of mere capital and physical labor.

203