The federal government would have to pay compensation if a state Labor government cancelled the East West Link, under an agreement Prime Minister Tony Abbott signed with Premier Denis Napthine seven weeks ago.

A deal signed between Canberra and the states and territories on October 10 says: "In the event that a project has been cancelled, contractual obligations will be shared by the Commonwealth and states in proportion to their funding."

The same deal would allow the Abbott government to divert funds to other projects in the same state.

If a major transport project part-funded by Canberra is cancelled, the Commonwealth "may choose to reallocate its share of any remaining funding to another project or projects in the relevant state", it says.