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Despite Mistake in Contract Language, Former Employee Not Permitted to Collect Windfall Severance

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In Dahua Technology USA, INC. v. Zhang, the District Court granted a Plaintiff-employer, Dahua Technology USA’s, motion for summary judgment and ordered the reformation of the severance agreement at issue. In so holding, the Court noted that the Defendant-employee, Zhang, breached his duty of good faith and fair dealing in attempting to hold Dahua Technology to erroneous contract terms and that there was no genuine dispute that a mistake (mutual or otherwise) occurred in the drafting of the severance agreement at issue.

In this case, Dahua Technology prepared, and Zhang signed, a several agreement that erroneously provided for sixteen monthly payments to Zhang of $680,000 instead of a $680,000 total severance in sixteen monthly installments. It was only after the Zhang accepted installment payments totaling $680,000 that he demanded that Dahua Technology pay him approximately sixteen times that amount, which caused Dahua Technology to initiate legal proceedings.

Under Massachusetts law, the terms of a contract can be “reformed” by the Court if the contract language is the product of a mutual mistake or if the mistake was made by one party and the other party knew or had reason to know of the error. Where, as here, a party to a contract alleges that its terms are a mistake, the Court may look to extrinsic evidence, such as the parties’ communications at the time the contract was created or prior drafts of the contract, to discern the parties’ intentions in drafting the terms of the contract.

Reviewing the facts underlying the Duhua Technology-Zhang dispute with these considerations in mind, the Court concluded that Zhang either knew (or had reason to know) that Dahua Technology had made a mistake in presenting a severance agreement providing for a payout of $680,000 per month versus $680,000 in total. Viewing the totality of the circumstances surrounding the negotiation of the severance agreement, including all of the documents submitted and testimony provided in connection with same, the Court ruled that no genuine interpretation of the facts could exist to the contrary. Given that fact, including that Zhang had readily accepted the installment payments that aligned with Dahua Technology’s expectations over a sixteen-month period of time without issue, the Court determined that Zhang was in breach of the implied covenant of good faith and fair dealing, which is an unwritten duty designed to ensure that parties to a contract receive the benefit of their bargain. As such, it ruled that Dahua Technology did not have to adhere to the severance agreement’s erroneous terms and “reformed” the contract to reflect a $680,000 total severance payment.

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