At the beginning
Lawyers commonly rely on boilerplate termination clauses. However, this can be risky. Termination provisions determine who may walk away from a contract, on what grounds, and with what financial consequences. Careful drafting is therefore critical to ensure that termination rights properly reflect the commercial risk allocation intended by the parties.
This article examines how termination operates under both contract and common law, and how careful drafting can reduce disputes and better align legal rights with commercial risk.
Concurrent Termination Rights: Contract and Common Law
Termination rights arise from both the contract itself and the common law. This dual-rail operation highlights the tension between freedom of contract and fairness. On the one hand, courts stay away from interfering with the parties’ agreement where their intention is clearly expressed. On the other hand, courts presume the continued operation of common law termination, allowing a party to walk away where performance has significantly deviated from the contract.
The strong presumption of concurrency
The concurrent operation of contractual and common law termination is illustrated by Concut v Worrell [2000]. The contract permitted the employer to terminate the employment “without any notice or payment in lieu of notice or liability for damages or otherwise”. After summarily terminating under that clause, the employer later sought to rely on a common law ground of termination in order to claim damages at common law.
The High Court held that the common law right remained available. There is a strong presumption that parties do not intend to abandon their common law remedies, and the clause did not contain clear and unequivocal language sufficient to rebut that presumption.
The Full Federal Court reiterated the strength of the presumption in Wallace-Smith v Thiess Infraco (Swanston) [2005]. The contract provided that a party “must not, except as permitted by [this Agreement], terminate or accept the repudiation of, or suspend the performance of, this Agreement”.
At first glance, this formulation appears to confine termination strictly to contractual mechanisms. However, the Court held that it did not exclude the common law right to terminate for repudiation.
The reasoning turned on construction. The clause admitted of two plausible interpretations. It might mean that common law termination was excluded. Alternatively, it might mean that termination for repudiation could occur, but only in accordance with the contractual machinery.
Where two constructions are available, and one preserves common law rights while the other extinguishes them, the court will prefer the former unless the language is clear and unequivocal.
How to rebut the presumption?
The concurrency is not immutable. In Commonwealth v Amann Aviation Pty Ltd [1991], the contract provided that “whenever and so often as” the contractor failed to comply with specified requirements, the Commonwealth could issue a notice and, if dissatisfied with the response, cancel the contract.
The Full Federal Court held that this language excluded the common law right of termination. The expression “whenever and so often as” evinced a clear objective intention that termination was to occur only through the contractual process.
Drafting Lesson: Clear and Unequivocal Language
The contrast between the cases is instructive. where a party seeks to exclude the common law right of termination, it is insufficient that a clause merely be capable of bearing that intention. Rather, the clause must admit of only one construction, namely, that the common law right of termination is excluded.
Contractual Termination Drafting Techniques
General counsel should recognise that within a dual-rail termination framework, they retain significant discretion in designing how termination is regulated. This section outlines three principal drafting models and identifies key parameters lawyers should consider when translating commercial risk into enforceable contractual right.
Three Drafting Models
Three principal drafting models can be identified: minimalist, exclusive, and hybrid.
Minimalist model
Under a minimalist approach, a default clause may be drafted without prescribing specific termination consequences, leaving termination to be governed largely by common law principles. In this context, lawyers should carefully distinguish between curable and non-curable breaches, as that distinction may influence how a court characterises the term as a condition, warranty, or intermediate term, and therefore affect whether a common law right of termination would arise.
A clarifying clause that may be included in a minimalist contract is as follows:
“If a party fails to perform any obligation under this Agreement, the other party may exercise any rights and remedies available at law or in equity.”
The minimalist approach preserves flexibility but accepts uncertainty, as termination will depend upon judicial characterisation of breach or repudiation. This approach may be suitable for simpler contracts or relationships where rigid termination machinery is unnecessary.
“Covering the field” model
By contrast, a “covering the field” approach seeks to regulate termination comprehensively within the four corners of the contract. Under this model, common law termination rights are usually expressly excluded, and each default provision is paired with defined consequences. The clause specifies whether a particular breach results in automatic termination or whether notice must be given to afford the defaulting party an opportunity to cure.
An example of a clause adopting this style is as follows:
“If any Events of Default occurs, the non-defaulting party may give 14 days’ written notice requiring the breach to be remedied. If the breach remains unremedied at the expiry of that period, the non-defaulting party may terminate this Agreement without further notice.”
This model may enhance predictability, particularly in high-stake transactions. However, the exercise of termination rights remains subject to statutory and equitable constraints, including the potential application of the Australian Consumer Law to unfair contract terms.
Hybrid model
A hybrid approach incorporates contractual default provisions while preserving common law termination rights. Under this model, the contract specifies events of default and procedural steps, such as notice and cure periods, but does not, or partially, exclude termination at law for repudiation or fundamental breach.
One example is as follows:
“If a party breaches any obligation under this Agreement, the non-defaulting party may terminate by giving 14 days’ written notice. Nothing in this clause excludes any right to terminate at common law for repudiation or fundamental breach.”
The extent to which parties choose to exclude common law termination rights will depend on the commercial risk profile of the transaction. In arrangements exposed to significant uncertainty, preserving common law flexibility may provide greater room to respond to unforeseen events or serious non-performance. By contrast, in stable or heavily regulated transactions, parties may prefer a tightly defined contractual regime that prioritises certainty over flexibility.
Four steps to draft a good default clause
Lawyers should always draft with commercial reality in mind. But before cramming the contract with accounting numbers and financial formulas, it is important for lawyers to turn their minds to several key steps before making their drafting choices.
Identifying the risks
The first step is always to identify the risks in the transaction. Operational risk may arise where a party simply fails to perform. Market risk may arise where price movements make performance commercially unattractive. Legal or regulatory risk may arise where a change in law renders performance unlawful.
Risk cannot be removed, but it can be allocated. That allocation reflects bargaining power. A contract between a start-up and a major bank will not mirror one between parties of equal strength. The function of a default clause is to convert that bargaining imbalance into a defined allocation of risk.
Event of Default
The second step is to define the Events of Default. These should be concrete expressions of the risks identified above and typically linked to one party’s fault. Common examples include non-payment, inaccurate representations, insolvency events and other foreseeable matters that materially threaten the continuing performance of the contract. Each trigger should be drafted so that it is objectively ascertainable and capable of proof.
Curable and incurable defaults
The third step is to determine whether each default is curable or incurable. This classification depends on commercial reality and power dynamics. The same breach may justify a cure period in one contract but immediate consequences in another. Curable defaults are generally appropriate where the consequences of breach can realistically be remedied and where preservation of the relationship is commercially important. By contrast, where certainty and speed are critical, an incurable default may be appropriate, triggering immediate consequences, which may include termination.
If the default is intended to be curable, a notice from the non-defaulting party is usually required. Notably, a cure period granted in a notice does not alter the original contractual deadline unless the contract permits such variation. If no period is specified in the contract, the law may imply a reasonable time for the defaulting party to cure the default. To minimise uncertainty, it is generally preferable for lawyers to stipulate the cure period within the contract itself.
Bargaining imbalance may, in some circumstances, render an otherwise curable default incurable. However, statute may intervene to moderate that imbalance. For example, insurance legislation may relieve the insured’s non-compliance with notice requirements, and tenancy legislation may impose mandatory notice obligations on landlords despite contrary contractual drafting. The list is not exhaustive, but statutory rules and overlays must be considered when drafting default clauses.
Consequences of default
The fourth step is to determine the consequences of default. Those consequences may include suspension, acceleration of payment, step-in right, novation, or termination.
In practice, this choice is usually guided by commercial considerations and the nature of the breach. For example, where a breach may attract high-stakes consequences, parties often prefer to afford the defaulting party an opportunity to cure and choose to eliminate common law termination rights to reduce uncertainty and confine termination to a controlled contractual process.
Common Law Termination
At common law, termination generally arises in three situations: repudiation, breach of condition (as opposed to warranty), or breach of an intermediate term where the consequences are sufficiently serious.
Repudiation
The test of repudiation was articulated in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007], being whether the conduct would convey to a reasonable person in the position of the innocent party a renunciation of the contract as a whole, or of a fundamental obligation under it.
Two points warrant emphasis.
First, common law countries have different focus when assessing repudiation. In the United Kingdom, courts tend to focus more heavily on the seriousness of the breach or the potential breach when determining repudiation. In Australia, the authorities nonetheless make clear that intention, rather than the seriousness, is the primary consideration. The question is whether the conduct objectively conveys an unwillingness or inability to perform. In Koompahtoo, continuing breaches were not held to amount to repudiation because the defaulting party demonstrated an intention to remedy the defaults and keep the contract on foot.
In practice, communication is critical. Lawyers should avoid using language such as “we will not perform” unless termination is genuinely intended, as such phrasing may be relied upon as evidence of repudiation. Where breaches have caused serious consequences, lawyers should advise their clients to take prompt and concrete steps to remedy the default. Active efforts to cure can objectively demonstrate an intention to keep the contract on foot and reduce the risk of unintended termination.
Secondly, a wrongful termination may itself amount to repudiation, and sometimes a mistaken interpretation of the contract would not save that wrongful termination.
For lawyers, before alleging repudiation, it is critical to assess whether the breach concerns a fundamental obligation, so as to avoid wrongful termination. Professional advice is essential. Alternatively, issuing a notice rather than terminating immediately may mitigate the risk of wrongful termination.
Breach of Condition
Termination at common law also arises for breach of a condition. Explicitly label a term as “essential”, “incurable” or “condition” may help parties to signal that strict compliance is required and that breach will justify termination.
However, two cautions are necessary.
First, time is not automatically of the essence in Australia unless the contract clearly provides. Delay will justify termination only if time is explicitly characterised as a condition, or if the delay is so serious as to amount to repudiation.
Secondly, the court is not bound by the parties’ chosen labels in characterising contractual terms. Describing a term as a “condition” or “essential” does not conclusively determine its status. As confirmed in Koompahtoo, characterisation turns on construction of the contract as a whole and the objective importance of the obligation.
To minimise the risk of unintended judicial characterisation, lawyers should expressly define in the interpretation clause what is meant by “condition”. By way of example, a drafting formulation may provide as follows:
“Condition means a term of this Agreement that the parties have designated as essential to the very substance of the consideration provided under this Agreement, such that any breach of that term by a party shall entitle the other party (at its election) to terminate this Agreement and to claim damages for loss suffered as a result of that breach.”
Additionally, indiscriminate labelling of every contractual term as a “condition” or “essential” should be avoided. Overuse of such terminology may invite the court to read down the language and treat the provision as no more than an ordinary contractual obligation
Intermediate Terms
Australian law also recognises intermediate or innominate terms. Breach of such a term will justify termination only where the consequences deprive the innocent party of a substantial part of the benefit of the contract or render further performance commercially impracticable.
In practice, courts have commonly treated reporting, banking, and record-keeping obligations as intermediate in nature, with termination turning on the seriousness and practical impact of the breach rather than the label attached to the term.
If a party is uncertain whether a breach is sufficiently serious to justify termination, it should refrain from terminating unless and until proper legal advice has been obtained and the terminating risks are fully understood.
Damages and Strategic Election
The decision whether to terminate under the contract or at common law is not merely procedural. It may affect the scope of recoverable damages.
For many years, Shevill v Builders Licensing Board [1982] was commonly understood to stand for the proposition that loss of bargain damages was available only where termination occurred at common law, and not where a party terminated pursuant to an express contractual right. On that view, electing to terminate under the contract carried the risk of limiting damages to those flowing from accrued rights, rather than the full value of the contractual bargain.
That understanding has been significantly refined.
In Redrouge Nominees Pty Ltd v Canberra Institute of Technology [2025], the Court held that loss of bargain damages may still be recovered where termination occurs pursuant to a contractual right, provided that repudiation in fact existed and the contractual mode of termination did not produce materially different legal consequences amounting to an abandonment of common law rights.
For general counsel, the lesson is twofold.
If a party does not intend to expose itself to loss of bargain damages, that intention should be addressed expressly at the drafting stage. This may be achieved by explicitly excluding loss of bargain damages or by excluding common law termination rights from the outset, thereby preventing repudiation from being invoked as a pathway to broader recovery.
Conversely, if a party intends to preserve the ability to claim loss of bargain damages, prudent drafting should include what is commonly described as an “anti-Shevill” clause. Although not strictly mandatory, an express preservation of all rights and remedies at law reduces the risk that contractual termination will later be characterised as an abandonment of common law rights.
Conclusion
Termination is not boilerplate. It is where risk becomes consequence.
General counsel should draft this section deliberately. The decision to preserve or exclude common law rights, and to control damages exposure, should reflect the commercial deal.
If only one clause deserves careful tailoring, it is the termination clause.
Further Information
For further information about fault-based termination, termination clause drafting, common law and contractual termination rights, repudiation, and damages risk, please contact the author of this article:
