<PAGE>


                                                                  EXHIBIT  10.26
                                                                  --------------

                 Smurfit-Stone Container Corporation Letterhead



                                          January 4, 2002
Mr. Ray Curran
55 W. Delaware Place
Apt. #506
Chicago, IL 60610

Dear Ray:

The following Letter Agreement is to confirm our agreement on the termination of
the Employment Agreement between Smurfit-Stone Container Corporation (the
"Company") and you dated as of April 1, 1999 (the "Employment Agreement"). It is
understood and agreed that you will retire from your positions of President and
Chief Executive Officer and as a Director of the Company, effective as of
January 4, 2002 (the "Retirement Date"), and that, except as expressly stated
herein, the Employment Agreement shall be deemed to be terminated as of such
date. At the Company's request, you shall execute any and all documents
reasonably necessary to confirm your resignation as an officer and director of
the Company and its subsidiaries. The following provisions have been agreed
between the Company and you in connection with your resignation and the
termination of the Employment Agreement:

1.   Cancellation and Termination of Employment Agreement. Within 10 days
     ----------------------------------------------------
     following the Retirement Date (or if later, within 10 days following the
     date of this letter), the Company shall pay to you in U.S. dollars an
     amount equal to the aggregate of the following:

     (a)  Three (3) times your current annual base salary of $1,325,000; plus

     (b)  Three (3) times $1,275,000, the amount of the award paid to you for
          2000 under the Management Incentive Plan of the Company (in cash);
          plus

     (c)  Three (3) times the amount reimbursed to you by the Company for
          financial planning services and tax return preparation during 2001;
          plus

     (d)  Four hundred thousand dollars ($400,000).

     This payment shall be in consideration for your agreement to cancel your
     Employment Agreement. The Company has no reason to believe that the Company
     will undergo a change-in-control within the meaning of Code Section 280G
     and as a result no payments hereunder should be subject to the excise tax
     described in Section 6(c) of the Employment Agreement. Notwithstanding the
     foregoing, if such payments shall

<PAGE>

Mr. Ray Curran
January 4, 2002
Page 2

     ultimately be determined to be subject to the excise tax, the Company shall
     pay to you a Gross Up Payment (as defined in the Employment Agreement).

2.   Pending Salary and Other Items. The Company shall pay any accrued and
     ------------------------------
     unpaid salary to which you are entitled as of the Retirement Date in
     accordance with normal payroll practices (it being understood and agreed
     that you have no accrued and unused vacation or other paid leave as of the
     Retirement Date). Concurrently with the payment of the amount required
     under Section 1, the Company shall pay your 2001 Management Incentive Award
     at an amount equal to 40% of your current salary, or $530,000, in cash. The
     Company shall reimburse you for all unpaid business expenses incurred by
     you if submitted to the Chief Financial Officer of the Company within 30
     days following the Retirement Date in accordance with Company policy. All
     perquisites currently supplied to you by the Company, such as club dues and
     a car, facsimile, and telephone in Ireland, will be provided for the
     duration of the Consulting Agreement.

3.   Continuation of Benefits. For a period of three (3) years following the
     ------------------------
     Retirement Date (the "Benefit Continuation Period"), the Company shall
     continue in force all Company-provided insurance coverage for you and your
     spouse, including medical, dental, life and disability coverage, based on
     your base salary as of the Retirement Date. If the continuation of any of
     such coverage is impractical or legally prohibited, the Company shall
     either purchase comparable coverage from third party providers reasonably
     acceptable to you or pay you in cash the amount of premium the Company paid
     for such coverage immediately prior to the Retirement Date. During the
     Benefit Continuation Period, if you purchase long-term disability coverage
     with after-tax dollars, the Company will reimburse you, at least annually,
     for the amount of such premiums, up to an annual amount of after-tax
     dollars you paid to purchase long-term disability coverage before the
     Retirement Date.

4.   Outplacement Service. The Company shall reimburse you for outplacement
     --------------------
     services incurred by you in the search for other employment, up to a
     maximum of $50,000. At your option, the Company will pay your outplacement
     service provider(s) directly, up to the maximum amount set forth in this
     Section.

5.   Pension. You shall continue to receive credit for continuous service under
     -------
     the Company's Pension Plan for Salaried Employees and the Company's
     Supplemental Income Pension Plan III for three years following the
     Retirement Date. It is understood and agreed that your aggregate pension
     benefit under these plans will be offset by the pension benefit that you
     receive from the retirement plan(s) of Jefferson Smurfit Group plc.
     ("JSG"). The Company presently estimates that your monthly pension benefit
     from the Company's Pension Plan for Salaried Employees and the Company's
     Supplemental Income Pension Plan III at age 60 will be approximately
     $12,678 (assuming that you do not become eligible for social security in
     the U.S.) over and above the approximately $25,000 monthly benefit you will
     receive from JSG. You have not been designated as a participant in the
     Company's Supplemental Income Pension Plan II, however, the

<PAGE>

Mr. Ray Curran
January 4, 2002
Page 3

     Company agrees to establish for you a supplemental pension income program
     that will purchase an annuity for you from an insurance company reasonably
     acceptable to you, which will provide you with an annual benefit,
     commencing on the Retirement Date, equal to the difference, if any, between
     (i) $200,000, and (ii) the aggregate annual payments to you for each
     corresponding year pursuant to the Company's Pension Plan for Salaried
     Employees and the Company's Supplemental Income Pension Plan III. The
     parties understand that you will not qualify for benefits under the
     Company's pension plans until May 13, 2006, at the earliest, so for the
     intervening period from the Retirement Date until then, the full $200,000 a
     year will be provided in monthly payments of $16,667. US dollars. At your
     option, in lieu of the annuity referred to in the immediately preceding
     sentence, the Company will pay to you an amount, in cash, equal to the
     premium it would otherwise have had to pay in order to purchase the
     annuity.

6.   Stock Options. All options to acquire common stock of the Company granted
     -------------
     to you under the stock option plans of the Company and its predecessor,
     will vest no later than the Retirement Date or such later date as you may
     specify in writing within five days of this Letter Agreement. You will be
     permitted to exercise such options at any time prior to the earlier of (i)
     the expiration or other termination date of such options or (ii) the fifth
     anniversary of the Retirement Date.

7.   Consulting Agreement. The Company and you shall enter into a Consulting
     --------------------
     Agreement, effective as of the Retirement Date (the "Consulting Agreement")
     on customary terms and conditions pursuant to which you shall provide
     executive consulting services for the Company as requested by the Board of
     Directors or the Chief Executive Officer at times mutually agreeable for a
     period of three years following the Retirement Date. The Consulting
     Agreement shall provide for an annual consulting fee of $2,200,000, payable
     quarterly in arrears. During the Consulting Period, your attendance at the
     Company's offices shall not be required. During the Consulting Period, you
     agree to cooperate fully with the Company in any investigation,
     negotiation, litigation or other action arising out of any transaction in
     which you were involved or of which you had knowledge during your
     employment by the Company, and will provide indemnification for any and all
     actions taken by you in performance of consulting services under that
     Agreement to the same extent indemnification is provided for actions taken
     by you as a director or officer of the Company. Under no circumstances,
     however, shall your obligation to the Company under this Section
     unreasonably interfere with your consulting, employment or other
     obligations to any third party.

8.   Restrictive Covenants. The Restrictive Covenants set forth in Section 7 of
     ---------------------
     the Employment Agreement shall apply to you for the term of the Consulting
     Agreement, and shall be extended to apply to the European Community as well
     as the United States.

9.   Publicity and Nondisparagement. Both the Company and you shall publicly
     ------------------------------
     characterize the termination of the Employment Agreement and your
     resignation as a retirement. You agree not to, directly or indirectly, make
     any public disclosure or take any action to cause

<PAGE>

Mr. Ray Curran
January 4, 2002
Page 4

     public disclosure that would be inconsistent with your resignation being
     characterized as a retirement. You hereby consent to the public disclosure
     of the contents of this Letter Agreement by the Company in accordance with
     applicable laws and regulations governing disclosure of executive
     compensation.

     Without limiting the provisions of the Restrictive Covenants set forth in
     Section 7 of the Employment Agreement, you further agree that you will not,
     directly or indirectly, individually or in concert with others, engage in
     any conduct or make any statement calculated or likely to have the effect
     of undermining, disparaging or otherwise reflecting poorly upon the Company
     or its good will, products or business opportunities, or in any manner
     detrimental to the Company and any parent, subsidiary, affiliate or other
     entity related to the Company, as well as its or their predecessors,
     successors and assigns, shareholders, directors, officers, agents,
     representatives, servants, and employees, past, present and future (the
     "Company Parties") at any time following the Retirement Date. If you breach
     this provision, you agree to indemnify the Company against all liability,
     costs and expenses, including reasonable attorneys' fees, related to such
     breach.

     The Company Parties agree that the Company Parties will not, directly or
     indirectly, individually or in concert with others, engage in any conduct
     or make any statement calculated or likely to have the effect of
     undermining, disparaging or otherwise reflecting poorly upon you, or in any
     manner detrimental to you. If the Company Parties breach this provision,
     the Company Parties agree to indemnify you against all liability, costs and
     expenses, including reasonable attorneys' fees, related to such breach.

     The provisions of this Section shall not apply to testimony as a witness,
     compliance with other legal obligations, assertion of or defense against
     any claim of breach of this Letter Agreement, and shall not require the
     Company Parties or you to make false statements or disclosures.

10.  Release. In consideration of the benefits and payment to be paid hereunder,
     -------
     you hereby release, forever discharge and hold harmless the Company
     Parties, individually and collectively, from any and all claims, demands,
     causes of action or liabilities, that you ever had, or now have, or that
     your heirs, executors or administrators hereafter can, shall or may have
     upon or by reason of any matter, cause or thing whatsoever, whether known
     or unknown, suspected or unsuspected, arising out of or in any way
     connected with your employment and/or separation from the Company. Without
     limiting the generality of the foregoing, this release applies to any right
     that you have or may have to commence or maintain a charge or action
     alleging discrimination under any federal, state or local statute (whether
     before a court or an administrative agency), and any right that you have or
     may have to commence or maintain a claim or action alleging wrongful
     termination, breach of contract, commission of tort, or any combination
     thereof, whether based in law or in equity. You agree not to make, assert
     or maintain any charge, claim, demand or action that would be covered by
     this release. If you breach this provision, you agree to

<PAGE>

Mr. Ray Curran
January 4, 2002
Page 5

     indemnify the Company against all liability, costs and expenses, including
     reasonable attorneys' fees, related to such breach.

     The Company Parties hereby release, forever discharge and hold you and your
     heirs, executors or administrators harmless from any and all claims,
     demands, causes of action or liabilities, that the Company Parties ever
     had, or now have, or that hereafter can, shall or may have upon or by
     reason of any matter, cause or thing whatsoever, whether known or unknown,
     suspected or unsuspected, arising out of or in any way connected with your
     employment and/or separation from employment. Without limiting the
     generality of the foregoing, this release applies to any right that you
     have or may have to commence or maintain a charge, action or claim for
     benefits under the Company's Supplemental Income Pension Plan II. Except as
     provided in the preceding sentence, this Section 10 shall not apply to (i)
     actions or claims to enforce this Letter Agreement or the Consulting
     Agreement, (ii) claims for indemnification that is required to be provided
     to you by the Company under Sections 7 or 11 or pursuant to the Consulting
     Agreement, or (iii) claims you may have now or in the future arising out of
     or relating to any benefit, retirement, pension or other similar
     employment-related plans or benefits to which you are or may become
     entitled as a result of your employment with the Company or any of its
     affiliates or predecessor entities. The Company Parties agree not to make,
     assert or maintain any charge, claim, demand or action that would be
     covered by this release. If the Company Parties breach this provision, the
     Company Parties agree to indemnify you against all liability, costs and
     expenses, including reasonable attorneys' fees, related to such breach.

11.  Indemnification and Insurance. The Company shall continue to indemnify you
     -----------------------------
     and provide applicable directors' and officers' liability insurance
     coverage (including, where required, legal defense) to the same extent it
     indemnifies and provides liability insurance coverage to officers of the
     Company.

12.  Legal Fees. The Company will pay the reasonable attorneys' fees and actual
     ----------
     out-of-pocket expenses of your legal advisors incurred in connection with
     negotiating this Letter Agreement, not to exceed $25,000.00, which amount
     will be in addition to any payments described elsewhere in this Agreement,
     upon submission of invoices for such fees and expenses.

13.  Office Support. The Company shall continue to employ Ms. Karen Korienek at
     --------------
     an annual salary of $82,500 until the earlier of (i) three years from the
     Retirement Date, or (ii) the date you begin employment with another
     employer in Chicago that provides office space and support and by whom Ms.
     Korienek is also employed, during which time Ms. Korienek will report to
     you, and will not be required to report to the offices of the Company.

14.  Relocation Expenses. The Company shall reimburse you for the reasonable
     -------------------
     expenses of relocating your personal residence and belongings from Chicago,
     Illinois, incurred within

<PAGE>

Mr. Ray Curran
January 4, 2002
Page 6

     one year of the Retirement Date, if required by your new employment, up to
     a maximum of $150,000.00.

15.  Tax Matters. The Company agrees to cooperate with you to structure the
     -----------
     payments made under this Letter Agreement in a manner most tax effective to
     you, provided the Company is not economically disadvantaged or legally at
     risk by such structure.

16.  Entire Agreement and Interpretation. This Letter Agreement and Section 7 of
     -----------------------------------
     the Employment Agreement as modified herein constitute the entire agreement
     of the parties with respect to the subject matter hereof, and may not be
     modified except by a writing signed by you and the Chairman of the Board or
     Chief Executive Officer of the Company. The laws of the State of Illinois
     shall govern the validity, interpretation, construction and performance of
     this Agreement, without regard to the conflict of laws principles thereof.
     The parties both agree to submit to jurisdiction and venue in the Courts of
     Cook County, Illinois. All dollar amounts referred to in this Letter
     Agreement are in United Stated currency.

17.  Acknowledgements. By signing this Agreement, you expressly acknowledge and
     ----------------
     agree that:

     (a)  you have read and fully understand the terms of this Letter Agreement;

     (b)  the payments and benefits described above are significantly more
          valuable than any payments or benefits you would otherwise be entitled
          to receive;

     (c)  you have been advised to consult with and have consulted with an
          attorney, Barbara Brown, prior to signing this Letter Agreement;

     (d)  each party has cooperated in the preparation of this Letter Agreement
          and, as a result, this Letter Agreement shall not be construed against
          any party on the basis that the party was the draftsperson; and

     (e)  you have knowingly and voluntarily entered this Letter Agreement,
          without any duress, coercion or undue influence by anyone.

18.  Counterparts. This Agreement may be signed in single or separate
     ------------
     counterparts, each of which shall constitute an original.

<PAGE>

Mr. Ray Curran
January 4, 2002
Page 7

     If the foregoing accurately sets forth our understanding, please execute
     the enclosed copy of this letter and return it to the Secretary of the
     Company.

                                        Sincerely yours,

                                        SMURFIT-STONE CONTAINER CORPORATION


                                        By /s/ M.W.J. Smurfit
                                           -----------------------------------
                                           Chairman of the Board

ACCEPTED AND AGREED AS
OF JANUARY 4, 2002


/s/ Ray M. Curran
---------------------------
Ray M. Curran