Rescinding termination agreement due to material misunderstanding

When the termination of an employment contract is negotiated between the employer and employee, the parties will usually sign a termination agreement. The agreement specifies the end date of the contract, wages, and benefits such as unpaid wages, economic compensation, overtime pay, etc., as well as the outstanding matters that need to be cleared up, and the handover period. The termination agreement plays a vital role in clarifying the rights and obligations of both parties and reducing the risk of labour disputes caused by the termination of the employment contract.

Suppose the employee is found to have breached any of the conditions stipulated in article 39 of the Employment Contract Law (e.g., serious violation of rules and regulations, grave dereliction of duty, graft or engaging in embezzlement, causing material damage to the employer, being held criminally liable). In such instances, the employer has the right to terminate the employment contract unilaterally. However, can the employer revoke the termination agreement on the grounds of material misunderstanding?

RELEVANT LEGAL PROVISIONS

Article 147 of the Civil Code states: “Where a civil juristic act is performed based on serious misunderstanding, the person who performs the act has the right to request the People’s Court or an arbitration institution to revoke the act.”

Article 19 of The Interpretation by the Supreme People’s Court of Several Issues Concerning the Application of Book One General Provisions of the Civil Code of the People’s Republic of China provides that if the person has misunderstood the nature of the act, the opposite party or the variety, quality, specification, price or quantity of the subject matter, and without such misunderstanding would not have made the corresponding expression of intent, the People’s Court may determine that the situation constituted a material misunderstanding under article 147 of the Civil Code.

If the person can prove that the civil juristic act is performed based on a gross misunderstanding, and requests the revocation of the civil legal act, the People’s Court shall support the request by law; however, except the person is deemed to have no right to request revocation based on the trading practice, etc.”

Article 35 of Interpretation (I) of the Supreme People’s Court of Issues Concerning the Application of Law in the Trial of Labor Dispute Cases provides that: “An agreement reached between an employee and an employer on the rescission or termination of a labour contract in respect of the relevant formalities shall be handled payment of wages, overtime pay, economic compensation (or indemnity), etc., and shall be deemed valid unless it violates the mandatory provisions of laws and administrative regulations or involves fraud, coercion or exploitation. The People’s Court shall support the request of the party to revoke an agreement mentioned above for a material misunderstanding or evident unfairness.”

According to the Civil Code and judicial interpretation of the subjective elements of material misunderstanding, the parties shall conduct the negotiation for termination of the employment relationship under the premise that the employee is not at fault during the period of the existence of the employment relationship, for which the employer has no right to terminate the employment contract unilaterally.

The parties sign a termination agreement based on this premise, specifying that the employer pays economic compensation to the employee under the law’s provisions and the negotiation outcome. If the employee conceals his or her serious violations of the rules and regulations to negotiate with the employer for a termination agreement, which makes the employer unaware of its right to unilaterally terminate the employment contract, there is no need to pay the employee economic compensation. In this case, the termination agreement is concluded based on a material misunderstanding, entitling the employer to request the cancellation of the termination agreement.

NON-REVOCATION CLAUSE

In practice, the employer usually drafts a termination agreement to prevent the employee from reneging and proposing to revoke the agreement for various reasons. The employer may include a clause that “this agreement is free from fraud, duress, material misunderstanding and other situations affecting the validity of the agreement, and the parties shall not request for confirmation of invalidity or revocation”, or similar clauses to exclude the right of rescission. In this instance, can the employer still revoke the termination agreement based on a material misunderstanding? The authors understand that it is possible for the following reasons:

First, the right of rescission for a material misunderstanding under article 147 of the Civil Code is a right prescribed by law such that neither party can exclude the application of it by an agreement. An agreement with the right waived should be deemed invalid.

Second, a stipulation in a termination agreement that the parties have no material misunderstanding of the agreement means the parties do not have a major misunderstanding of facts known and disclosed to them when the agreement is made.

Third, the exclusion of the application of rescission rights for a termination agreement based on material misunderstandings is contrary to its legislative intent, the purpose of which, provided in article 147 of the Civil Code, is to enable the person to structure the relationship of rights and obligations legally according to his or her will, and give sufficient grounds for legal remedies for a contract concluded due to defects in the expression of intent, protecting the freedom and voluntariness of the act and authentic expression of the intent, and avoid making the purpose of the civil act performed difficult to achieve.

If a material misunderstanding exists at the time of signing the agreement, which eliminates the right of rescission, the person can later discover that there is a material misunderstanding, but he or she is unable to use the right of rescission. As a result, the wrongful party may benefit from such a situation to achieve an improper purpose without fulfilling the legislative intent of the right of rescission provided by the Civil Code.

In conclusion, the employer has the right to request the People’s Court or arbitration bodies to revoke the termination of the employment contract on the grounds of material misunderstanding after negotiating and signing the termination agreement, if the employer finds that the employee has committed a wrongful act during the period of employment. Hence, the employer has the right to terminate the employment contract unilaterally without paying economic compensation per the Labour Contract Law.

Xie Yang is a partner and Han Ying is an associate at Zhilin Law Firm