Labor has backtracked on a Victorian election promise that no compensation would be paid for scrapping Melbourne’s East West Link just two months after coming to power.



Before the election, Labor leader Daniel Andrews said no compensation would be paid, and the contracts “aren’t worth the paper they’re written on”.



Labor wrote to the East West Connect consortium in December requesting a halt to work on the controversial road tunnel project that was approved by the previous state government.



On Tuesday News Corp publications reported consortium members were taking a hard line over the contracts, with some demanding $1.2bn to scrap the project. But the builder Lend Lease only wanted hundreds of millions of dollars, the Herald Sun reported.



The deputy premier, James Merlino, has now said a settlement will have to be reached with the builders and financiers of the $6.8bn road.



“There will be an agreement, a settlement reached, with the consortium and there has to be,” he told Fairfax radio on Tuesday.



Asked if the government would pay compensation to get out of the contract, Merlino said: “I think the issue is you can’t get out of this mess without talking to the companies involved in the project.”



A spokesman for East West Connect said the consortium was continuing its discussions with the government.



“Given the confidentiality obligations under the consortium’s contract with the state of Victoria we will not be commenting further at this time,” he said.

Treasurer Tim Pallas said financial adviser John Wylie and commercial litigator Leon Zwier were advising the government in the negotiations.



“Mr Wylie and Mr Zwier have agreed to work towards a fair and appropriate outcome for Victorian taxpayers in the circumstances where the government has decided that the project will not proceed,” Pallas said on Monday night.



“These discussions are commercial-in-confidence. The nature, timing and make-up of the meetings are confidential to all parties.”



The previous government signed the deal for the $6.8bn toll road and included a side letter guaranteeing compensation if the contract was ripped up.

Opposition leader Matthew Guy said Labor only had itself to blame for the scale of the compensation payout.



“Labor knew their claim that [East West Link] had no binding contract was wrong. It will now cost $1bn to scrap a roadway that Melbourne needs,” Guy said on Twitter on Tuesday.



In December, the Andrews government released a previously secret business case showing the benefit cost ratio for East West Link was just 45 cents for every $1 spent.



This increased to 84 cents when wider economic benefits were taken into account.