Key Australian contract law lessons from recent cases
17 February 2026
Our annual review of interesting contract law cases has highlighted a range of practical lessons for inhouse lawyers drafting and managing commercial contracts in 2026.
Hidden risks in payment clauses
Two recent apex court decisions, one from the High Court of Australia and one from the UK Supreme Court, are a reminder of the importance of drafting and compliance with contract terms relating to the manner of payment.
The decision of the High Court of Australia in Shao v Crown Global Capital Pty Ltd (in prov liq) [2025] HCA 44 highlights the risk of substantial damages for breach of the manner of payment even where a debt has been discharged.
The case concerned repayment of a loan advanced by two joint lenders, Ms Shao and Mr Peng, who were husband and wife at the time. An express “account nomination term” required the borrower to repay the loan into an account nominated by “the Lender”. Following the couple’s separation, the borrower paid the loan into an account nominated by Mr Peng only, breaching the account nomination term. Ms Shao pursued Mr Peng for misappropriation of the funds and in doing so affirmed the discharge of the debt. She then sued the borrower for breach of the account nomination term. The borrower argued that by affirming discharge of the debt, Ms Shao was precluded from pursuing damages.
The High Court unanimously rejected that argument. It held that the payment clause had a dual operation: it was both (1) a condition precedent to discharge of the debt, and (2) a separate contractual obligation governing the manner of payment. That meant damages were available for breach of the payment mechanism, even though the debt had been discharged. The High Court drew an analogy with sale of goods transactions: delivery may be a condition precedent to payment, yet a buyer may accept delivery and still sue for damages if it is late. Substantive performance and manner of performance are conceptually distinct.
In contrast, the decision of the UK Supreme Court in King Crude Carriers SA v Ridgebury November LLC [2025] UKSC 39 highlights the risk of non-accrual of a debt where payment related obligations are interpreted as conditions precedent.
The dispute in King Crude related to an unpaid deposit for the purchase of a ship. The buyer agreed to pay a 10% deposit into an escrow account under a standard form ship sale contract. The deposit was payable within three banking days after confirmation that the escrow account had been opened. The buyer was obliged to provide documentation necessary to open that account, but failed to do so.
In the Court of Appeal, the sellers successfully relied on a “deemed fulfilment” principle derived from Lord Watson’s decision in Mackay v Dick, arguing that where a party prevents satisfaction of a condition precedent, the condition should be treated as fulfilled. However, the UK Supreme Court unanimously rejected that approach. It described deemed fulfilment as an unhelpful fiction, and held that accrual of the debt was a matter of contractual construction.
Without deemed fulfilment, the outcome depended on the time of accrual based on interpretation. On the plain wording, the obligation to pay arose only after confirmation that the escrow account had been opened. That never occurred. The debt therefore never accrued. The sellers were confined to a damages claim and, in a rising market, were unable to establish loss.
Key lessons
- Payment clauses may create cumulative remedies: misdirected payment may discharge the debt but still expose the debtor to damages.
- Ensure internal business processes strictly comply with contractual payment mechanisms, particularly where updated account nominations are provided.
- Beware of conditions precedent embedded in payment clauses which prevent accrual of a debt altogether, even where the failure to satisfy the condition results from breach.
- Review escrow/security deposit type clauses in templates and precedents. Where payment depends on escrow or similar, separate accrual of the obligation from the mechanics of payment where that is the commercial intention.
Amending multi-party contracts
A recent case from Western Australia provided new appellate guidance on the variation of multi-party contracts when not all parties are involved in a subsequent amendment: Mirabela Nickel Ltd (In Liquidation) (Receivers and Managers Appointed) v Mining Standards International Pty Ltd [2025] WASCA 82.
The dispute arose from an asset sale agreement involving two Mirabela companies and receivers appointed to them (as sellers), Mining Standards International (as buyer), and a Brazilian company holding the Santa Rita Mine. The agreement contained a finance condition requiring the buyer to execute binding finance agreements, with a termination right available if this condition was not satisfied within 14 days after the exchange of signed copies.
A problem emerged when there was ambiguity around the deadline for the finance condition. Specifically, whether the 14-day period ran from when the buyer and sellers exchanged executed contracts, or from when Brazil Co also exchanged its executed contract. Subsequently, the buyer and sellers purported to alter this deadline without involving Brazil Co.
The Court confirmed that it is open to some parties to a multi-party contract to agree a variation of their rights as between themselves, provided they can do so without affecting the rights of other parties. In this instance, the variation was held to be binding on the buyer and sellers only, as Brazil Co's rights and obligations were not affected by a shorter timeframe for its obligation to use reasonable endeavours to help satisfy the finance condition. The Court also found that consideration for the variation was present in the mutual exchange of promises between the varying parties.
For further information see Ashurst's more detailed update.
Key lessons
- In-house lawyers should ensure that multi-party contracts contain clear deadlines for conditions precedent, avoiding calculating time from potentially ambiguous points such as "exchange of signed copies" or "date of document".
- Contracts should explicitly specify who can exercise termination rights. Clarify where a "party" can terminate whether this means all parties or only certain parties.
- A clause prescribing a process for variation is useful, but likely to operate only as evidence of the parties' intentions rather than being definitive.
- When seeking to vary multi-party contracts as between only some parties, ensure the variation not only satisfies formation requirements, but also that it does not affect other parties' rights and obligations.
Renewal discretion and the limits of contractual power
The New South Wales Court of Appeal’s decision in Netdeen Pty Ltd (t/as GJ Gardiner Homes) v Lindfield NSW Pty Ltd [2025] NSWCA 196 provides guidance on the interpretation and exercise of discretionary renewal clauses.
The case arose from a three-tier franchise structure. The master franchisee held a 10-year agreement with a negotiated option to renew. The franchisor adopted a strategy of “de-mastering” and refused renewal under a clause permitting refusal on grounds “honestly and reasonably held” that renewal would not be in the best interests of the franchisor and other master franchisees “and/or” sub-franchisees. The master franchisee alleged the agreement was wrongfully terminated.
There were two key interpretation issues in relation to the proper exercise of the discretion to refuse renewal. The first was whether “and/or” required consideration of both sets of interests (that is, master franchisees and sub-franchisees). The Court adopted a literal construction: the franchisor was entitled to consider either or both sets of interests. Importantly, this meant that it did not have to consider the best interests of the master franchisee.
The second issue was the role of master-franchisee performance factors listed in the renewal clause that “may” be taken into account. Despite the permissive wording, the Court held that these factors materially constrained the discretion to refuse renewal and must be considered in exercising the discretion. The Court justified this interpretation on the basis of the object and purpose of the agreement: the power could not be exercised for a substantial purpose extraneous to the contract’s object. The Court’s reasoning did not rely on an overarching doctrine of good faith. Instead, it applied orthodox principles of construction and proper purpose.
Practically this meant that the decision could not be based on a strategy of de-mastering alone. It needed to be based on master franchisee performance. This required a review of the decision making process, including board briefing papers and minutes. As there were no clear findings on this matter at first instance a re-trial was required.
The master franchisee also argued that the franchisor’s conduct amounted to statutory unconscionability under s 21 of the Australian Consumer Law. The Court refused to remit this issue, and took the view that the unconscionability claim added nothing to the breach of contract claim: the damages available for both causes of action were the same; and the statutory claim would fail if the discretion was properly exercised.
Key lessons
- Broad discretionary language does not necessarily confer unlimited strategic freedom. The purpose and structure of the contract may constrain exercise of the power.
- Define clearly the purpose and scope of discretionary powers, particularly renewal and termination rights.
- Beware that internal decision-making records may become critical evidence if there is a dispute about the exercise of a discretionary power. Maintain careful board records demonstrating that decisions are grounded in contractually permitted considerations.
Drafting notice and machinery clauses
The case of Alphington Developments Pty Ltd v Amcor Pty Ltd [2025] VSCA 48 addressed contractual machinery provisions and the construction of contractual notices, both topics of practical importance for in-house counsel managing complex commercial transactions.
It arose from the sale of a former paper mill site for development. The contract provided for the purchaser to remediate contamination at the vendor's expense, with machinery provisions to determine the work and its ultimate cost. However asbestos contamination later discovered at the site was unexpectedly widespread. The parties agreed to a standstill arrangement to enable remediation to proceed, with expert determinations on hold. Eventually, the parties informally amended the contract to remove references to expert determination. This gave rise to questions about the validity of contractual notices about the need for remediation, and whether the contractual machinery had failed.
On the construction of contractual notice clauses, the Court observed that the degree of strictness to be applied depends on three factors: the commercial purpose of the clause in context; the language of the relevant contract; and the nature and function of the notice. The Court adopted a narrower construction than at first instance, given the contamination notices did not finally determine the amount payable for remediation.
Regarding the failed contractual machinery, the majority judgment distilled a series of legal principles from the authorities for determining when and how a court should step in when the machinery does not work in practice. The Court indicated it may intervene where the machinery is non-essential to the contract's main purpose; is designed to determine fair, reasonable or market value; or where the contract has been part performed.
Key lessons
- When drafting notice clauses for a specific purpose, consider what details are needed for a notice to be valid.
- Avoid overly complex machinery provisions for quantifying a future payment, that may be susceptible to failure if they do not work in practice.
- When managing ongoing contracts, brief those implementing them on their contractual roles, and ensure that any standstill agreements do not inadvertently cause a failure of machinery.
- Courts sometimes step in where machinery genuinely fails and is not essential to the contract, or where the contract has been part performed.
MACs, warranties and election in M&A deals
The Mayne Pharma case provides practical lessons for in-house lawyers on the operation of Material Adverse Change (MAC) clauses and warranties in M&A transactions, as well as the doctrine of election: In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204.
The case arose from a scheme implementation deed where the buyer sought to terminate following perceived "deal remorse". After the deed was signed, the buyer learned of an earnings miss and an FDA letter addressed to the target. The buyer issued a notice of termination after the first court hearing to convene a meeting of shareholders.
The Court's treatment of the MAC definition was instructive. The MAC covered any change or event "reasonably expected" to diminish consolidated Maintainable EBITDA over a 12-month period by a specified amount. The buyer argued two events triggered the MAC: a shortfall in actual earnings against the most recent forecast, and an untitled FDA regulatory letter. The Court held that the difference between forecast and actual earnings could not constitute an "event" that would trigger the definition. The latest earnings had to be compared with past actuals rather than forecast earnings. Furthermore, "reasonably expected" was interpreted to mean more probable than not, and the threshold amount was not established on the expert evidence. While the FDA letter was found to constitute an "event", it was not proven to be adverse.
The Court also addressed alleged warranty breaches relied on as grounds for termination. Crucially, due diligence warranties were construed as relating to how the vendor had compiled disclosure materials as a whole. Thus, individual forecasts disclosed were not financial performance warranties. Similarly, forecasts with appropriate disclaimers did not represent that earnings were "expected".
The buyer was found to have affirmed the contract in three ways. First, by executing an amendment to the scheme implementation deed stating the deed remained in full force and effect. Secondly, by executing a Deed Poll covenanting in favour of scheme shareholders. And finally, by appearing without objection at the court hearing to convene the scheme shareholder meeting.
For further analysis, see Ashurst's more detailed update.
Key lessons
- MAC definitions with quantitative thresholds should identify a baseline, whether of actual or forecast earnings. They can also be drafted to provide for critical regulatory triggers where that is intended.
- Consider whether a fair disclosure carveout from a MAC definition should be broader or narrower in scope.
- Due diligence warranties may be construed as focusing on the preparation of materials rather than the truth of individual underlying documents. A forecast with a disclaimer is unlikely to warrant a company's financial performance.
- Be vigilant about acts that may constitute election by affirmation, as these can extinguish termination rights.
Tender teaming arrangements and intention to be bound
The Full Federal Court decision in Cirrus Real Time Processing Systems Pty Ltd v Jet Aviation Australia Pty Ltd (2025) FCAFC 85 provides important guidance on the enforceability of “teaming agreements” in tender contexts.
The dispute arose from a tender to the New Zealand Defence Force. The prime contractor entered into discussions with Cirrus to provide specialist software as part of its proposal. Cirrus was aware that the prime contractor was also engaging with another software provider in relation to certain elements of the tender, and sought and received, via an email exchange, written confirmation that it would be engaged if the tender succeeded. That confirmation was requested as a condition for relaxing confidentiality constraints under the parties’ NDA, which was necessary to enable the prime contractor to include Cirrus in the tender.
After the tender scope changed during negotiations with the customer, the prime contractor proceeded with a different software provider. Cirrus alleged breach of a binding teaming agreement based on the email exchange.
The Court held that there was no intention to create legal relations. Despite detailed commercial discussions and apparently commitment-oriented language, the exchange was characterised as part of the pre-contractual “twilight zone” typical of tender processes. Critical commercial terms remained unresolved, including matters previously identified as essential, and the language used was deliberately non-committal rather than clearly promissory. The Court also considered the informality of the email exchange, particularly in light of the parties’ prior use of formal documentation for binding arrangements, and the significant and uncommercial risk that Cirrus’s interpretation would have imposed on the prime contractor before the head contract scope and price were settled.
In assessing intention, the Court considered the relevance of post-contractual conduct, in particular various internal and external communications by the prime contractor suggesting a level of commitment or exclusivity. The trial judge had excluded such evidence unless known to both parties. On appeal the Court rejected any blanket exclusion, confirming that intention is assessed objectively in light of all the circumstances. However, the judges differed on whether these “lay” statements about intention were admissible. Justice Derrington held they were inadmissible as unqualified “legal opinion” from lay individuals. On the other hand, Jackman and Cheeseman JJ took the view that the statements were admissible, but of minimal weight.
The case underscores the tension inherent in tender collaborations. Parties often seek exclusivity and commitment to justify sharing confidential information and dedicating resources. At the same time, they seek to preserve flexibility pending the award and negotiation of the head contract.
For further details, see Ashurst's analysis in this update.
Key lessons
- Consider the risk of a “teaming agreement” where suppliers collaborate on a tender.
- If exclusivity or commitment is intended to be legally binding during a tender process, state that clearly and address essential terms.
- Beware that post contract conduct including internal communications may be admissible and relevant to intention.
Authors: James Clarke, Partner; Lixian Liang, Partner; Lisa Di Marco, Senior Lecturer, Monash University and Andrew Westcott, Expertise Counsel.
Want to know more?
- Variations to multi-party agreements: Unanimity is not always necessary (25 June 2025)
- No easy exit: Key takeaways from the Cosette / Mayne Pharma decision (17 October 2025)
- How do you know you have a binding contract? The latest word on intention to create legal relations and sub-contracting (30 July 2025)
