Maya runs a wholesale food distribution business in Melbourne. Her biggest retail customer was due to pay for the March order within 30 days, then the April order, then the May order. Three invoices are now more than 60 days overdue, her emails go unanswered, and she has just heard the customer is closing one of its two shops. Maya signed a supply agreement two years ago, and the customer now owes her around $40,000.
What Maya is facing is a breach of contract: a failure, without a valid excuse, to perform an obligation the customer promised under the agreement. Australian contract law gives the innocent party a menu of responses, from a phone call to a court claim. But the responses are not interchangeable. Some, like termination, are only available in limited circumstances. Others can backfire. Terminate a contract when you are not entitled to, and you may end up as the party in breach, owing damages yourself. The real stakes here are the $40,000, the commercial relationship that might still be worth saving, and a clock that is running on both your evidence and your legal rights.
1. Identify the term that was breached
Before any response makes sense, work out precisely what was promised and what was not delivered. Every remedy you might pursue hangs off this: whether the customer promised to pay by a certain date, to take a minimum volume of stock, or to keep its shops open for a fixed term changes what you can demand. A one-off late payment is a different problem from a customer who has stopped paying altogether.
Pull together everything that shows what was agreed and what happened:
- the signed agreement and any later variations or side letters
- invoices, delivery dockets and proof of delivery
- emails, messages and meeting notes about the orders and the delay
- anything that records what the breach has cost you, such as borrowing costs or stock you cannot sell
Avoid doing anything that weakens this record. Do not delete emails or "clean up" your files, and do not have informal phone calls about the dispute without taking notes. If the matter ends up in court, this material is the claim.
2. Read what your own contract says happens on breach
At the same time as you identify the term, check what the agreement itself says should happen when it goes wrong. Most commercial contracts contain their own machinery, and that machinery usually comes first:
- a dispute resolution clause, which may require a written notice of dispute and a negotiation or mediation period before anyone can go to court
- a termination clause, which sets out what triggers termination, how much notice is required and whether the other party gets a chance to fix the breach
- a clause describing the promise that was broken as essential, or stating what happens on breach, such as a fixed damages amount
This step matters because the right to terminate is not automatic. Under Australian law, a right to terminate generally arises where the breached term is an essential one, or where the breach is serious enough to go to the root of the contract. The High Court set out that framework in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61. A minor breach of a non-essential term will usually support a claim for damages, but not termination. So the question is not simply "did they break the contract". It is "what did they promise, how important was that promise, and what does the contract say happens if it is broken".
3. Put the breach on notice in writing
Once you know what the breach is, tell the other party about it in writing. A letter of demand or notice of breach serves two purposes: it often produces payment or a fix, and it creates a clear record of the date you raised the problem and what you asked for.
A useful notice covers:
- the clause or obligation you say has been breached, and how
- the amount owing or the loss suffered
- what you want done, such as payment, rectification of defective work, or compensation
- a reasonable deadline, and a statement that you reserve your rights
There is a wider reason to do this. Courts expect parties to have genuinely tried to resolve a commercial dispute before they litigate, and unreasonable refusal to engage can carry costs consequences. In New South Wales, parties to civil proceedings are under a statutory duty to assist the court to further the just, quick and cheap resolution of the real issues under s 56 of the Civil Procedure Act 2005 (NSW), and the court may refer proceedings to mediation, which parties must attend and participate in in good faith under s 27 of the same Act. Federal courts take a similar case management approach. A genuine negotiation now can save both the relationship and the legal costs.
Two cautions when you write. Do not threaten termination unless you are confident you are entitled to it, because a groundless threat can itself be treated as a repudiation that lets the other side walk away and claim against you. And do not keep accepting performance after the breach without saying your rights are reserved, because that can look like acceptance of the situation.
4. Choose: hold them to it, vary it, or end it
This is the decision that most business owners get wrong, because it is made by conduct as much as by words. If you know about a breach that would let you terminate, and you keep dealing with the other party as though the contract is still on foot, you may be held to have elected to affirm the contract and lost the right to terminate. Australian courts have applied that doctrine of election for decades, including in Sargent v ASL Developments Ltd (1974) 131 CLR 634. In practical terms, you do not get to keep taking the benefit of the contract and then terminate later for a breach you already knew about.
Your realistic options are:
- Hold them to it: Keep the contract alive, demand performance or payment, and claim damages for the loss the breach caused. This keeps the relationship and your bargain intact.
- Vary the contract: If the customer's circumstances have genuinely changed, you can agree to new terms, such as a reduced order volume or a longer payment period. Record any variation in writing and have both parties sign it. A deed of variation is the most formal way, and a variation made by deed is binding without needing fresh consideration.
- Terminate the contract: This is only available if the contract allows it or the law entitles you to it, which brings you back to the essential term or serious breach test from Koompahtoo. If you do terminate, follow the termination clause to the letter.
Before you send a termination notice, check:
- that the breach actually grounds termination, not just damages
- that you have not already affirmed the contract by continuing to accept performance
- that you have complied with any notice period or cure period in the contract
- that you have sent the notice in the way the contract requires
Terminating ends the contract's future obligations, but it does not give up your right to claim for losses the breach already caused you. Say so in the notice.
5. Recover what you are owed
If the dispute cannot be resolved by agreement, the court route has two parts. For unpaid invoices, you are claiming a debt: money that was due under the contract. For other losses, such as wasted stock or extra costs, you are claiming damages. The purpose of damages for breach of contract is to put you in the position you would have been in had the contract been performed, a principle confirmed by the High Court in Clark v Macourt [2013] HCA 56. Damages compensate for loss; they do not punish the breaching party.
A few points worth knowing before you commit to litigation:
- Mitigation: You must take reasonable steps to limit your loss. If you can resell stock the customer no longer wants, you are generally expected to. Damages will not cover losses you could reasonably have avoided.
- Interest: In New South Wales, the court may award interest on debts and damages from the time the cause of action arose until judgment under s 100 of the Civil Procedure Act 2005 (NSW). That can add meaningfully to a $40,000 debt.
- Time limits: A claim for breach of a simple contract must be brought within six years of the cause of action accruing under s 14 of the Limitation Act 1969 (NSW). For an unpaid invoice, the clock starts when payment fell due. Do not let the limitation period run out while you negotiate.
- Enforceability: A judgment is only worth as much as the other party's ability to pay. If the customer is closing shops and has no assets, the cheapest outcome may be a negotiated settlement, not a court win you cannot collect.
When a Commercial Lawyer Should Take Over
You can do steps one to three yourself, but the election and termination decisions are where lawyers earn their fees. If you bring this situation to us, a commercial lawyer would review the agreement and the correspondence to identify the breached term and assess whether it is essential, check for anything that looks like affirmation or waiver, and confirm you have complied with the contract's notice and dispute resolution clauses. They would then draft the formal notice of breach or letter of demand, negotiate a settlement with the other side or their lawyer, and advise on the strength of the claim, the likely costs, and whether the other party can actually pay a judgment. If litigation becomes necessary, the lawyer would manage the claim through the court process, including any court-ordered mediation. If the problem is familiar to you, or you are unsure whether your own conduct has already given away rights, that is the point to get advice before you send anything that commits you.
The Mistake That Makes You the Breaching Party
The single thing to remember tomorrow is that a breach does not automatically give you a right to terminate, and the most expensive mistake is acting as though it does. Terminate without the legal right, and you become the party in breach, exposed to a damages claim from the very business that owed you money. The safer sequence is always the same: identify the term, check the contract's machinery, put the breach in writing, and only then decide whether to hold, vary or terminate, with advice before you take the irreversible step.
The key points to take with you are these. A breach of an essential term, or a serious breach going to the root of the contract, can ground termination, while minor breaches usually only support damages. Continuing to accept performance after a breach can waive your right to terminate. Variations should be recorded in writing. You can claim the debt plus damages, interest and, if you act in time, your reasonable losses, but you must mitigate and you have six years from the accrual of the cause of action. When in doubt about your rights, speak to a commercial lawyer before you send the termination notice.