Termination of agreement and release: How-to guide

The end of an agreement is as important as its beginning.

A change in the business climate or the parties’ goals may signal that it’s time to terminate the contract and release the parties from their duties. Such a release will give both parties peace of mind, discharging their obligations and leading to an amicable arrangement conclusion.

A well-drafted termination and release agreement is the definitive end of the parties’ commitments and can help prevent future misunderstandings and disputes.

Note that termination is not an end in itself. It may open avenues of discussion with the other party that might otherwise have been closed. You can review your mutual expectations and concerns, perhaps laying the groundwork for future agreements and interactions. Assessing the parties' performance under the contract will give you both a better understanding of what should be required on termination.

Points to remember while drafting a termination agreement 

1. Review the agreement

Let each party examine the termination as well as the original agreement. By doing this, the chance of a claim that a party was unaware of any terms or how those would impact their rights or responsibilities will be lowered.

Both parties should carefully analyze the termination to ensure all key contract points have been covered. Being too inclusive is preferable to being too exclusive. Don't presume that specific clauses are accepted if something isn't explicitly stated in the writing.

2. Perform the duties until the termination is signed

Review the original agreement and draft a list of your obligations and rights. Take a moment to ensure that your interests have been satisfied.

Ensure both parties have performed all of their duties under the contract before signing a termination because the terms of your original agreement will still be in effect. Once the termination has been signed, the original agreement becomes void.

3. Sign the termination agreement

Make two copies of the termination agreement for both parties and sign them. Keep a copy of the signed termination with the original contract. Once the termination has been drafted and signed, it is the concluding part of the original agreement and should be treated accordingly.

Depending on the nature of its terms, you may decide to have your termination witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

If the original agreement or the conditions of your termination are complicated, contact an attorney to help you draft a document that meets your needs.

Sections in a termination and release agreement

The following step-by-step guide will help you understand the terms and provisions of your termination and release agreement. Please review the template in its entirety before starting the process.

Introduction

In the first section, write information about the parties involved and the date from when the termination will be effective. The parties must be the same as those who signed the original agreement (unless one of the new signers is an agent of the same company that initially signed).

Recitals

This section identifies the existing agreement that’s being modified and explains where your right to terminate the document comes from. Please put in the effective date of the original agreement and the section number of the original agreement that allows you to terminate it. Ensure you have attached a signed copy of the original agreement to this document.

Termination

This part explains that both parties agree to terminate the agreement but acknowledge that if there are any ongoing obligations in the agreement (for example, a responsibility to ensure the other party’s confidential information stays confidential), those will survive the termination.

Mutual release of liability

This section discharges both parties of any liabilities that could arise from the original agreement.

In other words, you agree that you will not sue the other party for some unfinished payment obligations. This section has the most significant impact as you are eliminating your ability to claim that you are still owed something under the original agreement (and the same is true of the other party with respect to your obligations). Unfortunately, the inclusion of this provision will not prevent a party from arguing that enforceable promises still exist, but it can provide you some protection from these claims.

Return of goods

Although it may seem obvious that any of your goods in the other party's possession should be returned after the agreement is terminated, it may be less apparent to the other party.

This section indicates that each party must return the other’s merchandise, and they are responsible for the condition the goods are in when they are returned. It also allows the parties to determine a time frame within which the property must be sent back.

Confidential information 

This clause serves mainly as a reminder to the parties that confidential information must remain confidential, even after the effective termination.

Review this section closely to ensure it provides sufficient security for your company and its proprietary information.

Non-disparagement

This section reflects the parties’ agreement that neither will say or do anything to damage the other’s commercial reputation.

Covenant not to sue

This section ensures that neither party will initiate or help others to initiate a lawsuit against the other based on claims released explicitly by the termination agreement. Again, the inclusion of this provision will not prevent all such lawsuits, but it can provide you some protection from those filings.

Governing law

The original agreement probably includes a choice-of-law provision that governs what laws will be used to interpret it.

If it does not, this section allows the parties to choose those laws.

Counterparts; electronic signatures

There are two explanations in this section:

1. Even if the parties sign the termination in different locations or use electronic devices to transmit signatures, the separate pieces will be considered part of the same document.
2. In a modern world where signing parties are often not in the same city—much less the same room—this provision ensures that business can be transacted efficiently without sacrificing the validity of the termination.

Severability

This section explains how it protects the terms of the termination as a whole, even if one part is later invalidated.

Entire agreement

In this section, the parties consent that the termination they’re signing (along with the original agreement) is “the agreement” about the issues involved. Unfortunately, the inclusion of this provision might not prevent a party from arguing that other enforceable promises exist, but it can provide you some protection from any potential claims.

Authority

This section guarantees that the parties signing the termination have the right and power to do so.

Headings

Here, you clarify that the headings in this section are meant to organize the document and should not be considered operational parts of the agreement.

Frequently asked questions

What's a termination of agreement and release?

Often, a lot of time and energy goes into crafting an agreement to begin a business relationship, but we don't always think about what we might need at the end.

Whatever the circumstances for parting ways, a termination and release, a contract termination agreement and release, or a mutual termination agreement is an agreement between the parties that ends the contract and releases people from their duties. And although no document can prevent lawsuits, it can help should things go sour.

What should be included in a termination agreement?

Here's the information you'll need to include in your termination of agreement and release:

• Who it's coming from: Determine if a business or individual is sending the document and have their name and contact information ready.
• Who it's going to: Know who this document is going to and have that individual or business name and contact information ready. If it's a business, know the business type (LLC, corporation, etc.).
• Which state will govern it: Specify a state so it's clear what laws apply to the document
• Subject matter: Have a summary of the nature of the original agreement ready, as well as any specifics within it about terminating the agreement
• Dates: Be clear about when the original contract will be terminated
• Things to return: If you or the other company needs to return items like laptops or merchandise, have that list ready (as well as a date when they will be returned)

Why is a termination and release agreement important?

As you tailor termination agreements to your specific needs, remember what you are trying to achieve: a profitable partnership, a relationship free of disputes, etc.

A well-written document should enhance the parties' understanding of their deal rather than obscure it. If any provision within your agreement is confusing, spend time trying to clarify its meaning.

A few hours spent improving your agreement is a valuable consideration and could save you weeks of problems in the future.

Other benefits of this document are that it can provide a clear and mutual understanding of the terms of the agreement, as well as help to set realistic expectations for both parties and answer questions at the outset of the contract. All of this, as well as implementing the tips provided, can help to minimize potential conflicts. But most importantly, if and when conflict or dispute does arise, you have taken a large step towards protecting your business with the help of an attorney.