Background
Darlinghurst P&C has operated an out-of-school hours care service (Darlo Play Centre) at Darlinghurst Public School under licence from the NSW Department of Education for several decades. The current licence agreement, dated 8 December 2020 and varied on 24 October 2023, had a scheduled end date of 11 October 2025 with a three-year extension period available. In June 2025, a Department official lodged allegations of conflicts of interest, financial irregularities, and child protection concerns. The Department subsequently conducted an internal audit in October 2025, which identified nine findings requiring remedial action but concluded there was no evidence of misappropriation. On 14 May 2026, without prior notice or opportunity for Darlinghurst P&C to respond, the Department issued a Notice of Termination effective 3 July 2026, citing multiple Events of Default.
Darlinghurst P&C sought an urgent interlocutory injunction to prevent the termination from taking effect, arguing that the Department had breached the express good faith obligation in clause 28.2 of the licence agreement and the implied duty to cooperate by denying it notice and opportunity to remedy the alleged defaults.
The Court’s Holding
Justice McGrath granted the interlocutory injunction, finding a serious question to be tried that the Department had breached the licence agreement. The court analysed clause 20.2(d) of the licence, which expressly provides that for remedial Events of Default, the Licensor must: notify the Operator of the default, request remedial action or explanation, and specify a timeframe for compliance. Similarly, the Operating Guidelines clause 7.7 sets out a detailed procedure for dealing with Events of Default. The court found that the Department had failed to follow this prescribed procedure, instead terminating the licence immediately without any prior notification to Darlinghurst P&C or opportunity to respond.
The court held that even where a contract contains broad termination rights, those rights must be exercised in accordance with express procedures and the covenant of good faith. The Audit Report itself identified that the nine findings were capable of remedy within specified timeframes, yet the Department took no steps to notify Darlinghurst P&C or invite remediation. The court concluded there was a serious question that the Department had breached both the express good faith obligation and the implied duty to cooperate. On balance of convenience, the court found that Darlinghurst P&C would suffer irreparable harm if the long-standing operation was terminated without fair procedure, while no equivalent harm would flow to the Department from maintaining the status quo pending trial.
Key Takeaways
- Contracts containing express procedures for dealing with remediable defaults must be followed even where a party has unilateral termination rights
- Good faith covenants restrict the manner in which contractual termination powers may be exercised
- Implied duties to cooperate require parties to afford fair process and opportunity to remedy before exercising drastic remedies
- Procedural fairness principles apply to government decision-making affecting long-standing service providers
- Where breaches are expressly identified as remediable, notice and opportunity must be given before termination takes effect
Why It Matters
This decision reinforces that termination rights in commercial and licensing arrangements, particularly those involving public sector agencies, must be exercised consistently with good faith obligations and express contractual procedures. Government agencies cannot bypass agreed procedures and deny subjects of licensing decisions a fair opportunity to respond and remedy, even where they believe serious breaches have occurred. The decision protects long-standing service operators from summary termination without notice and aligns administrative decision-making with principles of procedural fairness.
For licensees and service providers, this provides important protection: a party relying on termination for default must follow the agreed procedure and give genuine notice and opportunity to cure where the contract so provides. For government agencies and contracting authorities, it establishes that their termination powers are not unconstrained and must be exercised consistently with contractual language and good faith principles, reinforcing the rule of law in administrative actions.