Terminating a business sale contract: When does a purchaser lose the right to walk away?
A purchaser who discovers a breach of contract but proceeds with settlement may lose the right to terminate, even where the breach would otherwise justify termination.
The recent Queensland Court of Appeal decision in Ausgroup Engineering Services Pty Ltd v Melco Engineering Pty Ltd [2026] QCA 206 (Ausgroup v Melco) demonstrates the potentially significant financial consequences of proceeding with a business purchase despite knowledge of a contractual breach.
In that case, the purchaser attempted to terminate a $2.5 million business sale contract approximately three months after settlement. Although the seller had breached a contractual warranty that gave rise to a right of termination, the Court found that the purchaser had lost that right by its subsequent conduct.
The result? Judgment was entered against the purchaser and its guarantor for more than $3.18 million.
When can a purchaser terminate a business sale contract?
A purchaser may be entitled to terminate a business sale contract where:
- The seller breaches an essential contractual term;
- The seller commits a sufficiently serious breach of an intermediate term;
- The seller repudiates the contract; or
- The contract expressly provides a right of termination in the relevant circumstances.
However, not every breach gives rise to a right to terminate.
Whether termination is available depends on the terms of the contract, the nature and seriousness of the breach and the surrounding circumstances.
Even where a valid right to terminate exists, a purchaser must consider how it responds to the breach. Continuing with the transaction may constitute an election to affirm the contract, preventing the purchaser from subsequently terminating on the same ground.
What happened in Ausgroup v Melco?
In April 2024, Ausgroup Engineering Services Pty Ltd entered into a contract to purchase a Queensland engineering and fabrication business from Melco Engineering Pty Ltd for $2.5 million, together with work in progress and contractual adjustments.
The contract permitted the purchaser to defer payment of the purchase price for three months after completion, subject to monthly payments of $40,000 plus GST.
The contract also contained warranties concerning the business and its assets, including a warranty that no administrator, controller or managing controller had been appointed in respect of the seller, the business or its assets.
Before settlement, receivers and managers had been appointed to a company that owned premises leased to the seller and used in operating the business.
The purchaser became aware of the appointment before completion.
Nevertheless, on 10 May 2024, the purchaser proceeded with settlement, took possession of the business, assumed the benefit of business contracts and continued operating the business using its assets and workforce.
Following completion, the purchaser raised concerns about missing or defective plant and equipment and sought adjustments to the purchase price.
When the parties failed to agree, the purchaser issued a notice purporting to terminate the contract on 9 August 2024 and did not pay the outstanding purchase price.
Despite the purported termination, the purchaser retained possession of the business and continued operating it.
The seller disputed the termination and commenced proceedings to enforce its contractual rights.
What did the Queensland Court of Appeal decide?
The primary judge had found that the appointment of receivers breached a contractual warranty and entitled the purchaser to terminate the contract.
That finding was not challenged on appeal.
However, the Court of Appeal determined that the purchaser had subsequently lost its right to terminate by affirming the contract.
In reaching that conclusion, the Court considered that the purchaser had:
- Proceeded with settlement despite knowing of the receivership;
- Taken possession of the business and its assets;
- Assumed business contracts, leases and employees;
- Continued operating the business; and
- Made monthly payments under the contract following completion.
The Court found that this conduct was inconsistent with an intention to terminate the contract.
At paragraph [160], Bradley JA observed:
“The Buyer’s conduct was only consistent with an intention to continue to perform the contract.”
The Court concluded that the purchaser had waived its right to terminate based on the earlier appointment of receivers.
Accordingly, the purchaser’s notice of termination was ineffective, and the contract remained on foot.
The Court entered judgment against the purchaser and its guarantor for $3,182,879.96, including interest calculated to 3 October 2025.
The judgment included unpaid monthly instalments and contractual interest, demonstrating that the consequences of an ineffective termination can extend well beyond the original purchase price.
The Court separately remitted an issue concerning the seller’s obligations to provide releases or covenants relating to security interests over the business assets.
What is an election to affirm a contract?
Where a party becomes entitled to terminate a contract because of another party’s breach, it may face a choice between terminating the contract and affirming it.
Affirmation occurs where a party, with the requisite knowledge, acts unequivocally in a manner consistent with treating the contract as continuing.
In a business sale transaction, this may include proceeding with settlement, taking possession of the business, accepting the transfer of assets or continuing to perform contractual obligations.
Once a party has made a binding election to affirm the contract, it generally cannot subsequently terminate based on the same breach.
Importantly, affirmation does not necessarily extinguish a separate right to claim damages arising from that breach.
What should purchasers do if they discover a breach?
A purchaser who discovers a breach before settlement should carefully assess its position before proceeding with the transaction.
In particular, purchasers should:
- Identify the breach: Determine precisely which contractual obligation has been breached and whether it gives rise to a right of termination;
- Review the contractual remedies: Consider whether the contract provides for rectification, an adjustment to the purchase price, damages or termination;
- Consider the consequences of settlement: Assess whether proceeding with completion may amount to an election to affirm the contract;
- Document any negotiated resolution: Where the parties agree to proceed notwithstanding a breach, ensure that any variation, adjustment or preservation of remedies is properly documented; and
- Obtain legal advice before issuing a termination notice: An ineffective termination may expose the purchaser to substantial liability.
Purchasers should also be aware that a reservation of rights will not necessarily preserve a right to terminate where their subsequent conduct amounts to an unequivocal election to affirm.
What does the decision mean for sellers?
The decision is equally important for sellers facing allegations of contractual breach.
A purchaser’s notice purporting to terminate a contract does not necessarily bring the contract to an end.
Where the purchaser has already affirmed the contract, the seller may be entitled to insist on continued performance and enforce the purchaser’s payment obligations.
However, sellers should not assume that every purported termination is ineffective merely because the purchaser has taken possession or continued operating the business.
The question will depend on the contractual terms, the purchaser’s knowledge and conduct, and the circumstances of the alleged breach.
The importance of getting termination right
Ausgroup v Melco reinforces a fundamental principle of contract law: having a valid right to terminate a contract does not mean that right can be exercised indefinitely.
A purchaser who discovers a breach but proceeds with settlement may lose the right to terminate based on that breach.
Equally, a seller faced with a purported termination should carefully consider whether the purchaser was legally entitled to terminate and whether its earlier conduct was inconsistent with exercising that right.
The consequences of getting termination wrong can be substantial, particularly where the transaction involves deferred purchase payments, contractual interest and guarantees.
How Dark Legal can assist
Dark Legal advises and represents purchasers and sellers in commercial litigation and contractual disputes, including disputes involving business sale agreements, contractual warranties, unpaid purchase prices and contested terminations.
We provide strategic, commercially focused advice directed towards protecting our clients’ contractual rights and financial interests.
Whether you are considering terminating a business sale contract, responding to a purported termination or seeking to recover an outstanding purchase price, contact Dark Legal to discuss your legal position and available remedies.
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