This document is designed for use by parties to an existing contract that wish to terminate the contract and release each other from the contract.
In eight clauses the form covers
- termination of original agreement
- full settlement
- release of original agreement and claims
- execution of additional documents
- representations and warranties
- choice of law and dispute resolution
- the scope of the agreement
- a general clause detailing notices, governing language, use of headings, severability and counterparts
This form is intended for use in any state in the United States, and makes provision for Section 1542 of the California Civil Code.
You need this document if you are party to a US contract, and want to terminate the contract and release the other party from his contractual obligations.
This Termination and Release is intended for use by the parties to an existing contract that wish to terminate the contract and release each other from the contract. It is designed for use either by individual parties or by a corporation or other entity. Under this form, the original contract is terminated and the parties enter into a mutual release of the contract as well as of any claims that may be pending by one party against the other.
This form is intended for use in any state in the United States. However, as is the case with any agreement for use in the United States, regard must be had for the possibility of variations in the laws from state to state. In the context of commercial relationships, the laws do tend to be substantially similar among the states, but there are areas of substantive difference. In this regard, the state of Louisiana stands out in particular, as it bases parts of its commercial and other laws on the civil codes rather than on the common law.
One other state where a release may present an issue is California. Section 1542 of the California Civil Code provides as follows:
A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him, must have materially affected his settlement with the debtor.
As a result, in releases involving California it is advisable to add some general language to avoid the effect of Section 1542 of the California Civil Code, as follows:
Waiver of Civil Code Section 1542. Each party understands that this is a general release and acknowledges that by signing this Agreement it intends to, and does, WAIVE any and all claims related to or connected with the Claims which it now has or in the future may have against the other party, pursuant to and under the terms of Section 1542 of the Civil Code of the State of California.
It is advisable to check the law of any other state implicated by the release in order to insert appropriate language attempting to avoid similar laws elsewhere.
This form provides a good starting point for preparing a first draft of a contract Termination and Release. However, as with use of any form, it is very important to take the time to read the form in its entirety to ensure that it is customized appropriately for use in your individual situation. For all but the simplest of transactions, it can be anticipated that some customization will be in order; and as mentioned above, it may also be advisable to consult with competent legal counsel.
This form is styled very much on a U.S. model, with specific identification of the parties and definition of the business purpose of the Agreement in one or more recital clauses at the beginning of the Agreement. It is also customary to recite the mutual receipt of consideration. The length of the form and the tendency towards more detail may also come as a surprise to persons not accustomed to dealing with U.S. lawyers. That having been said, an attempt has been made to use “Plain English” and avoid the use of legalese wherever possible to do so.
NOTES ON USE OF THIS FORM
The parties’ names and states of residence/incorporation (as applicable) should be inserted at the beginning of the document.
Recitals (“Whereas” Clauses)
The first recital should be customized to reflect the title, date and nature of the original contract. Unless specifically warranted by the nature or complexity of the parties’ relationship, no further customization of the recitals is required.
Alternate signature blocks are included to accommodate execution by corporate parties and individual parties. These should be duplicated and/or deleted and customized as required. The italicized language in brackets is for guidance only and should be deleted.
1. TERMINATION OF ORIGINAL AGREEMENT
Paragraph 1.1 provides for termination of the original contract. Paragraph 1.2 is provided as template language in the event that the termination involves a deliverable from one party to the other – for example, the payment of cash or delivery of an assignment or bill of sale. In general, there should be mutual consideration for the termination; but if there remain mutual executory obligations under the contract on the part of both parties, then no further consideration should be needed, though this issue should be reviewed carefully before a decision is made. If it is not needed, paragraph 1.2 can be deleted.
2. FULL SETTLEMENT
Paragraph 2 recites that performance of the terms of the Termination has the effect of settling all liabilities and claims under the original contract. The purpose of this is to avoid any argument that claims asserted by one party against the other prior to the termination somehow survive the termination.
3. RELEASE OF ORIGINAL AGREEMENT AND CLAIMS
Paragraph 3 contains a mutual release by both parties, both in relation to the original contract and in relation to any claims asserted by one party against the other prior to the termination.
4. EXECUTION OF ADDITIONAL DOCUMENTS
Paragraph 4 contains “further assurances” language, requiring each party to perform other actions to implement the terms of the Termination.
5. REPRESENTATIONS AND WARRANTIES
Paragraph 5 contains a number of representations and warranties. In light of the fact that the document can result in the waiver of important contractual rights, it is important to recite that the parties have had access to legal advice and to confirm that they are entering into the Termination with complete knowledge of its legal implications.
6. CHOICE OF LAW AND DISPUTE RESOLUTION
Choice of law can be contentious in U.S. contract negotiations because there are 50 states to choose from, and each party may have an instinctive bias in favor of using its own state law. However, in this context the law governing the original contract is the obvious choice.
As noted above, it is advisable to check the law of any state implicated by the release in order to provide appropriate language attempting to avoid laws similar to those found in the California Civil Code.
The dispute resolution provision offers alternative language for arbitration and litigation. Even where arbitration is elected, it is helpful to include an exception for attempts to seek injunctive relief. The clauses do leave blank a number of matters, including the place of arbitration and the choice of state for litigation-based dispute resolution. The choice of rules is also bracketed in case the parties elect to use a different set of rules.
In U.S. litigation, the prevailing rule is that each party bears its own litigation costs (subject to some narrow statutory and other exceptions). The language in paragraph 6.3 is intended to impose the so-called “English rule” to litigation costs.
These paragraphs contain a number of “boilerplate” provisions. It is possible to omit some of them, but any deletions should be thought through carefully in light of the tendency of U.S. courts to engage in activism in the interpretation of contracts and the possibility that state law does not cover the precise issue being addressed. Of particular note:
Notice information should be completed in paragraph 7.1. Notice by e-mail could also be added as an option if the parties are comfortable with this method of notice.
Paragraph 7.4 should not be deleted. Most states have moved away from an “all-or-nothing” approach to enforcing illegal or unenforceable contract provisions, and the severability provision in paragraph 7.4 is an attempt to instruct a court to take a flexible approach to the Agreement in the event that one or more clauses prove to be illegal or otherwise enforceable, provided that it is still possible for the essential intent of the parties to be achieved.
8. ENTIRE AGREEMENT, MODIFICATION/WAIVER
This paragraph is commonly referred to as a “merger” clause, and is intended to avoid pre-contract discussions from surviving into the written contract. It also stipulates that amendment and waivers of the Agreement must be in writing in order to be effective.