What Is Termination by Mutual Agreement?
Termination by mutual agreement is just what it sounds like: the parties to a contract mutually agree to terminate that contract. When a contract is terminated, it is like it never existed. It is completely at an end, and each party to it is released from all future liabilities arising under or by virtue of that contract. In California, when a contract is terminated the obligations and rights created by that contract are discharged. They end. And, each party to the contract is released from any obligation to perform under that contract. Importantly, the parties may still create new obligations and rights that are related in some manner to the old contract.
This is not to be confused with a mere rescission of the contract. A mutual rescission does not necessarily terminate the contract. A contract rescinded will exist, but without binding effect on the parties. Like a nullification of the contract, the mutual rescission simply releases the parties from their obligations under the contract. With a simple rescission, all that is required is an offer by one party to rescind and an acceptance by the other party. But the parties are also not prevented from simultaneously making another contract.
Without a mutual agreement to terminate a contract , the contract remains in force and effect until performance of all terms required under the contract or until a court of law orders otherwise. Despite the title of "mutual," termination of a contract in this way does not require a meeting of the minds by the parties. It does not have to be accomplished by the exact process set forth in the contract. In fact, the parties may have even had a disagreement about the contract when all parties to the contract agreed to terminate that same contract. A mutual termination does not necessarily end all disputes, but instead can stem from them.
Most contracts include a provision allowing for termination. This may occur after notice to the other party or upon the exercise of a provision in the contract allowing for unilateral termination. The parties to the contract may nevertheless decide to mutually terminate the contract even if it is not allowed so provisionally. Depending on the contract, the parties may want to end the obligations before one of them breaches the contract (called anticipatory breach), or a party may want to mitigate any damages suffered by them as a result of a breach of the contract.
Mutual Termination Legal Basis
The legal framework surrounding the concept of termination by mutual agreement depends largely on the jurisdiction in which the agreement was made. Assuming that both parties are acting of their own free will, this form of termination is possible in virtually every jurisdiction in the world. Essentially, agreements between the parties to the contract are made as if there was no termination by mutual agreement and include the portion of the contract that was not satisfied.
In the United Kingdom, termination by mutual agreement is admissible in almost every situation. The consideration required for termination by mutual agreement is very slight. Provided that there is some benefit to either party, even token consideration is acceptable. As such, claims for damages following a termination by mutual agreement can be difficult to prove as they can be construed as speculative. Section 1(1) of the Law Reform Act 1961 (UK) states that "(1) Where, before a right of action has accrued, any act or omission causing loss, damage or injury is done to a person or to his goods, the person doing the act or making the omission shall be liable to compensate for the loss, damage or injury, even though the period allowed for bringing the action in respect of it has not passed". Therefore, a claim for loss of profits following a termination can be difficult because the action must be based on existing rights and not future profits that would be asserted should the agreement have been fulfilled.
In the United States, most contracts contain a provision for mutual termination. A contract can be cancelled by mutual consent, even if this is not stipulated in the contract, as long as there is no wrongdoing by either party. Similarly, there are often two provisions for termination by mutual agreement stipulated within the contract, one written into the contract and an escrow provision. Generally, either mitigating losses or demonstrating potential profits are the reasons for the cancellation. The American Suite of International Rules Procedure suggests that contracts be terminated by mutual agreement if there is delay in performance caused by an external event. However, similar to the UK, claims for loss of profits resulting from the mutual termination are not always straightforward.
In Singapore, any contract may be terminated at any time by mutual consent. However, if the contract is for an indefinite period, either party must give reasonable notice. If contractual damages were stipulated prior to the termination, these may be claimed but only if they are reasonable. If contractual damages were not stipulated prior to termination, damages may be claimed but not for any prospective losses.
Contrastingly, in India, an offer of rescission of a contract is available to the other contracting party but it is not compulsory. However, if the offer of rescission is accepted by the other party, the contract is automatically discharged. Similarly in Germany, contracts may be cancelled by the express agreement of both parties. But alternative dispute resolution is preferred as opposed to judicial intervention. With each jurisdiction there is a slight difference in each variation of an agreement whereby damages can be reclaimed but only if these are reasonable.
Benefits of Mutual Termination
Termination of an employment contract by mutual agreement is usually the best possible outcome for both employer and employee. It is preferable to dismissal for a number of reasons. For employers, it avoids the risk of an unfair or wrongful dismissal claim in circumstances where it would be relatively easy for an employee to establish dismissal was not for a fair and reasonable cause. For employees, termination by mutual agreement means they would not need to show the employment terminated by the employer’s conduct, or that they resigned from their role. In other words, both parties had a part to play in the decision to end the employment relationship.
It is also a pragmatic solution for both parties. Parties may want to end the employment relationship for any number of personal, legal or commercial reasons. Some examples include: If the parties have come to the decision to end the employment relationship amicably, for example because the employee has obtained alternative employment, it is likely that neither party will wish to prolong the relationship.
An amicable, negotiated termination of the contract also provides certainty. In circumstances where there could have been contention about whether the employee or the employer had "won", or had some liability to pay damages to the other, the agreement ends any dispute that might develop. The mutual agreement means that nothing else is owed, and no residual employment rights are available to either party. For example, neither party can make a Tribunal application for unfair dismissal, as neither party would be eligible to bring such a claim after a consensual termination.
Commonly Seen Examples of Mutual Termination
While not every employment relationship is best severed in a way that is cooperative and amicable, there are many situations where termination by mutual agreement is considered ideal for both the employer and the employee.
One of these situations would be when an employee is facing performance or conduct issues – whether real or perceived. An employment relationship built on mutual trust and the benefit of the doubt is one where an employee is generally more likely to agree to a mutual departure agreement (for example, an agreement that might mirror a release of wrongful dismissal lawsuit and provide one or several months of salary continuation). The same might be said for an employee who has encountered personal difficulties, such as health issues, that may have affected their work, and for whom an amicable parting is desirable given the difficult circumstances.
Similarly, where an employee is near retirement age, or where they are otherwise desirable and may be offered a position with a competitor, it would not be uncommon for the employee and employer to wish to terminate the employment without triggering non-competition obligations.
Finally, contract positions often benefit from termination by mutual agreement simply because there is an opportunity to negotiate a settlement that would see the employee released from their obligations, and compensated for years that they were required to work before becoming eligible for regular benefits such as disability or retirement.
How to Effect a Mutual Termination
Once both parties have agreed to the termination of the relationship, the following steps should be used to arrive at a satisfactory conclusion:
- Documentation of mutual termination is typically accomplished by means of a short written agreement prepared by the party which does so in a manner that preserves its rights to seek damages for prior breaches.
- If the termination occurs as part of a settlement of prospective or ongoing litigation, it will be part of the settlement agreement, with reference made to the various causes of action in the underlying case that the parties agree to settle.
- If the relationship terminates in conjunction with the execution of a new agreement between the same parties, the termination will be included in the new agreement, along with any necessary releases.
- Once the foregoing steps are completed, it is prudent for the parties to obtain an acknowledgment from the other confirming that the relationship has been terminated and that the party has no further claims against the other, except as specifically provided in the mutual termination agreement, settlement agreement or new agreement, as the case may be.
Mutual Termination Pitfalls and Avoidance
There are some potential pitfalls when it comes to mutual agreement terminations. While a new slate is often welcome, the termination can come with some conditions that are not – especially if one side has more leverage than the other. Consider the following ways a termination by mutual agreement can go sideways, and how to avoid them.
The worst scenario would be if an employer agrees to terminate an employee without realizing at the time that it was not legally "clean" or in line with a contract, and misses out on its chance for appeal. Employers and employees should be wary if they do not have legal advisors to help navigate a termination during the process. When it comes to unwinding a relationship without a negotiating table, there’s no buffer zone for an employer who makes a costly mistake or a wrong assumption about the position being terminated. The employer might think it’s letting its employee go because the business is downsizing, when, in fact , it actually needs to let the worker go for performance reasons. An employee (or former employee) might expect that by signing an agreement to terminate their employment, they will be able to return to the workplace if they change their mind. This act is likely to have unintended consequences. The termination is supposed to be mutually agreed on, not unilaterally set aside by either party. If the employee wants to change their mind, that’s fine – but they’ll have to work for it. Don’t make written statements on terms of a new agreement until you’ve consulted with an attorney to get the new deal ironed out. An employee might assume that all of the terms from the original contract still apply, but this may not be the case. For example, if the worker had non-competition clause, they might think it’s still enforceable. Not necessarily. Unwinding a relationship isn’t as cut and dried as it seems – employers must pay close attention to the old agreement after it has been terminated in case the employee later tries to enforce some of those clauses.
Mutual Termination Agreement Drafting Guide
When drafting a mutual termination agreement, many of the same clauses that are customarily included in unilateral termination agreements are still relevant. Certain clauses present unique challenges for mutual termination agreement. A majority of the issues that arise in mutual termination agreements involve IP assignment agreements or licenses because the parties can cancel an agreement based on both a desire to terminate and an IP default.
One challenge for either party is that an affirmative statement of the parties’ intention to terminate an agreement may result in patent or copyright assignment to the other party. In some patents, assignment of ownership rights is required prior to applying for a patent. Without an affirmative statement, it can be possible for the parties to mutually agree to terminate an agreement while keeping any assignments of rights in IP in the mix. Stated differently, if parties mutually agree to terminate an IP agreement without making a positive statement in the termination agreement that they are assigning all rights in IP created under the agreement to that defendant party, the first party can try to get back the assignment in the future if that same agreement is terminated, even though the parties previously agreed to terminate.
Further, the termination agreement should expressly revoke the right to use any of the breaching party’s trademarks after the effective termination date. If a trademark licensee breaches its obligations under an agreement, the trademark can be terminated. If parties mutually agree to terminate an agreement, the breaching party may have been in a position where it had the right to license the trademark to third parties during its use of the license, so the licensee may be able to continue to use that trademark in the market. A specific provision stating that the license independent of the agreement has been revoked upon termination of the mutual agreement will avoid this issue.
This section should also contain a duration and effects clause which states that the provisions of this section are only for a certain period of time or upon the completion of certain conditions. This is important in order to allow the parties to continue to maintain certain provisions if necessary. It is also important to consider including dispute resolution, governing law, and notices clauses.
Examples of Effective Mutual Termination
To illustrate the power of mutual terminations, consider the case of Employee X. She works as an accountant for a large company, a job that she finds increasingly frustrating and unfulfilling. The stress level at work has been high lately due to a substantial organizational change. Employee X goes to her supervisor and expresses her desire to leave her job. The supervisor is sympathetic but does not want to lose Employee X. He offers her a higher salary and a new project to work on. Employee X is tempted to take the offer but she knows that it will only be a temporary fix. Ultimately she declines it and proposes a mutual separation. She meets with HR and negotiates severance and a neutral reference. Within two weeks, the parties have mutually terminated the relationship.
In contrast, in the case of Employee Y, the termination is not so easy. Employee Y is an experienced technical resource who is well compensated and critical to the Company’s success. Unfortunately he has been unproductive for some time and his ongoing presence is compromising the performance of an otherwise strong team. The Company knows that a direct termination would be disastrous and has tried unsuccessfully to manage Employee Y out quietly for a significant period of time. When it appears that no amount of coaching or managing will improve Employee Y’s performance, the Company begins to think about a mutual separation. However by this point Employee Y has little incentive to consider the option. The company finally calls him in and explains its position and the hope of a mutual separation. This conversation seems to embolden Employee Y to be overtly defiant. Employee Y in fact believes that he is the victim of a witch hunt, partly because of his age and partly because of what he believes is an unreasonable amount of pressure from a new manager. The Company’s failure to consider a mutual separation earlier is costing it dearly.
Conclusions and Legal Advice
It is important to remember that termination by mutual agreement could be a more difficult process than it first appears and the statutory implied terms could be incorporated into it. Also, as this type of termination could be voluntary, care should be taken to ensure that no possible grounds for an ‘unfair dismissal’ complaint is given.
In our experience, a meeting between the parties is a good way to effect a practical and amicable termination. However , this should not be done without legal advice, as for the employee, there are a number of grounds on which he could argue that he was dismissed and therefore unfairly dismissed, for example:
- via constructive dismissal;
- that the reasons for a resignation are putative only; or
- where it results from a repudiatory breach of the employment contract by the employer.
A mutual agreement could also give rise to issues involving breach of a contract or duty of good faith by either party.