Introduction
Termination is often described as the “nuclear weapon” of contract law. When exercised, it brings the life of the contract to an immediate end and fundamentally alters the parties’ legal relationship. Because of these consequences, the law imposes a number of important limits on when and how termination may occur.
These limits arise from several sources. Some operate generally and constrain both contractual and common law termination. Others apply only to common law termination or contractual termination.
This article examines those limitations in turn. It first considers constraints that apply to both contractual and common law termination, before turning to limits specific to common law termination and contractual termination. It then addresses the risk of invalid termination and briefly considers how to use of notice to reduce that risk.
Implied Duties: Good Faith, Cooperation and Prevention
Limitations on termination may arise from implied obligations of good faith, which is often pled together with the implied duty to co-operate and the duty not to prevent and dispense. The content and scope of these duties may overlap and, at times, operate interchangeably. The unified principle is that a party must not exercise its contractual rights, including any right of termination, in a manner that deprives the counterparty of the benefit of the contract. Accordingly, even where a contractual power appears broad on its express terms, its exercise may nevertheless be constrained by these implied norms.
In Burger King Corporation v Hungry Jack’s Pty Ltd (2001), Burger King terminated a franchise agreement because of Hungry Jack’s failure to meet agreed restaurant development targets. However, Burger King had itself withdrawn approvals and prevented Hungry Jack’s meeting the contracted development target. The Court held that Burger King breached an implied obligation of good faith in the exercise of its contractual powers because it had prevented Hungry Jack from complying with the target. The termination was therefore invalid.
In practice, lawyers should bear in mind that even where a default clause permits termination, the exercise of that right may remain subject to implied duties of good faith.
Equitable Limits: Relief Against Unconscionable Termination
In addition, equity may intervene to restrain the exercise of a contractual right to terminate where unconscionable.
However, unconscionability requires more than a harsh outcome. The conduct must fall within recognised categories of equitable unconscionability, such as exploitation of a special disadvantage, bad faith, fraud, mistake, or other conduct contrary to conscience in an established sense.
In Tanwar Enterprises Pty Ltd v Cauchi [2003], the contract for sale of land expressly made time of the essence. However, the purchaser failed to complete by the agreed date and the vendors terminated the contract. Because property values had risen, the purchaser argued that the termination was unconscionable, as it allowed the vendors to obtain a commercial gain.
The High Court rejected that argument. There was no special disadvantage, and no bad faith. The vendors simply enforced a clear contractual stipulation. The fact that termination produced a financial benefit did not render it unconscionable. The termination was therefore valid.
Affirmation, Waiver and Estoppel
Furthermore, a right to terminate may be lost by affirmation of contract, waiver, or estoppel. In practice, these grounds are often pleaded together.
Two points require particular attention.
First, affirmation may arise from conduct. In many cases, acceptance of a late payment has been held to amount to affirmation. Lawyers should therefore exercise caution before accepting payment, as doing so may preclude termination.
Secondly, affirmation can only occur with knowledge of the breach. If the counterparty conceals its breach and induces conduct that appears to affirm the contract, the right to terminate is not thereby lost.
From a practical perspective, communication is critical. Lawyers must ensure that conduct or negotiations are not later characterised as affirmation if that is not the client’s intention. To manage that risk, correspondence should expressly reserve the right to terminate at the outset and before any substantive engagement. Where appropriate, it should also be framed on a without prejudice basis.
In-house lawyers must manage time strategically. Delay alone does not amount to affirmation. A party is entitled to a reasonable period to assess its position and, where appropriate, negotiate improved terms. However, that period must remain reasonable. Prolonged or unexplained delay may result in loss of the right to terminate. Counsel should avoid both extremes: neither rushing into affirmation and thereby forfeiting leverage, nor unreasonably prolonging the decision in an attempt to extract concessions.
Statutory Constraints on Termination
There are also statutory limitations that may override contractual terms. For example, the Australian Consumer Law may affect termination rights. It prohibits unconscionable conduct, unfair contract terms, misleading or deceptive conduct, and more. Other statutory regimes may also affect termination rights, including the Insurance Contracts Act, Residential Tenancy Act, and Sale of Goods Act.
The list is not exhaustive. The key point is that a contract does not operate in isolation; it operates within a broader legal framework that includes both equity and statute. Lawyers should remain mindful of that framework when drafting clauses, as a failure to do so may risk rendering the contract illegal and exposing the parties to unforeseen consequences.
Limitation Applying Only to Common Law Termination: Readiness and Willingness
Common law termination is subject to an additional constraint: the doctrine of readiness and willingness.
The doctrine requires that a party seeking to terminate for breach must not itself be in substantial breach, or otherwise unwilling or unable to perform the contract in substance.
A recent illustration can be seen in Singh v Ozzie Homes Building & Construction Pty Ltd [2026] VSCA 25. In that case, a builder sought to terminate a residential building contract after the owners refused to pay a progress claim for the alleged completion of the lock-up stage. The builder issued a notice of termination and also sought to justify the termination by reference to the owners’ alleged repudiation.
The Court of Appeal held that the builder had earlier suspended the construction works and had not done so in accordance with the contractual procedure governing suspension. That suspension itself constituted a substantial breach of the contract. Because the builder had stopped work and was not continuing to perform its obligations, it could not establish that it remained ready and willing to perform the contract.
In terminating a contract at common law, it is necessary to assess not only the counterparty’s breach, but also the terminating party’s own performance position. A party that is not substantively ready and willing to perform may lose the right to terminate at common law, even if the counterparty’s breach is established.
Limitation Applying Only to Contractual Termination: The Ipso Facto Regime
Contractual termination rights are now subject to additional statutory limitation under the ipso facto regime. For contracts entered into on or after 1 July 2018, a party is generally prevented from enforcing a right to terminate, or otherwise alter the contractual relationship, where that right is triggered only because the counterparty has entered into certain formal insolvency processes. These include voluntary administration, receivership over the whole or substantially the whole of the company’s property, and schemes of arrangement.
However, it is important to understand that the ipso facto regime is NOT limited to termination. It also stays other rights triggered only by insolvency, such as accelerating payment, or suspending performance. Nor does the regime prevent enforcement of rights arising from a substantive breach. Where the counterparty has committed an independent default, such as non-payment or failure to perform, those rights remain enforceable despite the stay. Finally, the regime is NOT a blanket ban. There are statutory exceptions. For example, rights triggered by winding up may still be enforced, and rights preserved under a deed of company arrangement may also be exercised.
The case of Rathner illustrates the importance of careful drafting of ipso facto clauses.
In that case, the contract in dispute contained the following termination clause:
“The Dexus Parties may immediately terminate the agreement by written notice to Citius upon the occurrence of any of the events specified in cl 16.1, which relevantly include:
(ii) an Insolvency Event occurring in respect of Citius (cl 16.1(d))”
The term ‘Insolvency Event’ was defined to include:
“tak[ing] any step to obtain protection or is granted protection from its creditors, under any applicable legislation or an administrator is appointed’ (cl 1.1, para (i)).”
The termination clause was held to be an ipso facto clause, and its enforcement was stayed upon entry into voluntary administration.
The drafting lesson is clear. Rather than defining termination rights by reference to a single bundled “insolvency event”, parties should define each ground of termination as separate and severable limbs. This ensures that the stay of one ground, such as entry into administration, does not prevent enforcement triggered by other grounds, such as liquidation or substantive breach.
In addition, termination provisions should include clearly defined performance-based triggers, such as non-payment, breach of material obligations, or failure to comply with contractual standards. These rights arise independently of insolvency and remain enforceable notwithstanding the stay.
Risk of Invalid Termination
Termination carries inherent risk. A purported termination without a valid legal basis may itself constitute repudiation, entitling the counterparty to accept that repudiation and claim loss-of-bargain damages. Even a bona fide but mistaken belief in a right to terminate will not avoid that consequence.
However, it is important to understand what an invalid termination is NOT. The long-established Shepherd principle demonstrate that reliance on an incorrect ground at the time of termination does not preclude a party from later justifying the termination by reference to a valid ground that in fact existed. For example, if a party terminates relying on ground X, which is invalid, the termination may still be justified if a valid ground Y already existed at the time.
Although the Shepherd principle gives a terminating party greater flexibility, caution is required since the scope of the Shepherd principle remains unsettled in circumstances where the terminating party knew of a valid ground but deliberately chose not to rely on it. As a matter of practice, where a valid ground is available and known, it is prudent to rely on the valid one.
The Strategic Use of Notice
That risk of invalid termination cannot be eliminated, but it can be reduced by the use of notice.
Before turning to the reason, it is worth noting that notice is typically not a mandatory requirement for common law termination, although it is often required for contractual termination. Nevertheless, the use of notice can be strategically beneficial to the terminating party in both contexts.
Use of Notice in Common Law Termination
For common law termination, there is considerable uncertainty, as the law relies on a number of indeterminate “reasonableness” standards that afford courts a wide scope of discretion.
To reduce that uncertainty and lower the risk of invalid termination, the terminating party may issue a notice stating its intention to terminate, allowing a reasonable period to cure the breach, and confirming its willingness to perform once the breach is remedied. If the counterparty fails to cure the breach within that period, the notice and the failure to cure may later serve as evidence supporting termination on the basis of repudiation.
However, such notice may not be appropriate in every case. Where commercial circumstances require immediate termination, the use of notice may not be suitable. Lawyers should therefore assess the commercial reality of the transaction before deciding whether notice should be used strategically.
Use of Notice in Contractual Termination
Notice is usually a mandatory requirement for contractual termination where the contract so requires.
Such clauses often regulate what the notice must contain and how it must be given. For example, the clause may require the notice to be in writing, signed, and addressed to a specified service address. Traditionally, such formalities were strictly required to be complied with. However, more recent authority adopts a less technical approach, particularly in commercial contracts.
In Allsopp v Elly Property & Ors, the loan deed imposed a notice requirement for termination, providing that the notice must “be correctly executed by the Party or the Party’s solicitor”. In that case, all notices given by Allsopp were not signed and were argued by the Elly NOT to be “correctly executed”
Nonetheless, the Supreme Court of Victoria rejected the contention that “correctly executed” mandated formal signature or deed-style execution, describing such an interpretation as “unrealistic” and “uncommercial.” Rather, the Court held that the typed name in the email was sufficient to identify and authenticate the communication, and the notices were therefore effective.
The case shows that a court is more willing to uphold termination notices which have substantially achieved their commercial function, even where there are technical defects.
That case, however, does not mean that substantive notice requirements can be ignored. In Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006), the termination clause provided:
“The Sub-Licensor may terminate this Agreement immediately upon written notice to the Sub-Licensee:
(a) if the Sub-Licensee commits a breach of any term or condition of this Agreement and does not remedy the breach … within 30 days after written notice …”
However, the actual notice failed to specify any required remedial steps.
The Full Federal Court therefore held the notice to be invalid. This is because the clause apparently contemplated the sub-licensee be given 30 days to cure a breach with a specified remedy. In the absence of a specified remedy in the notice, the recipient would not know how to cure the breach. Accordingly, that notice was ineffective.
Courts may disregard purely formal defects, however they will not excuse non-compliance with requirements that form part of the substantive content of the notice.
Conclusion
Termination is a powerful but constrained remedy. Its exercise is shaped not only by the express terms of the contract, but by a broader framework of implied obligations, equitable principles, statutory intervention, and, in the case of termination at common law, the requirement of readiness and willingness.
For practitioners, the analysis must be structured. It requires identifying the source of the termination right, recognising the limits that attach to it, and assessing both the counterparty’s breach and the terminating party’s own conduct. Particular care must be taken to avoid inadvertent affirmation, to ensure compliance with any applicable notice regime, and to distinguish between insolvency-triggered rights and performance-based defaults in the context of the ipso facto scheme.
Ultimately, termination is not simply a question of entitlement, but of execution. The legal and commercial consequences of error are significant, and the margin for mistake is narrow.
Further Information
For further information about contractual and common law termination, invalid termination risk, and drafting and notice strategy, please contact the author of this article:
