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First Circuit Reverses District Court’s Grant of Summary Judgment

In Dahua Technology USA, Inc. v. Zhang, the First Circuit U.S. Court of Appeals reversed the District Court’s grant of summary judgment in favor of the Plaintiff-employer, Dahua Technology USA Inc. The District Court had ordered the reformation of the severance agreement at issue on the basis that the Defendant-employee, Zhang, breached his duty of good faith and fair dealing 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 the Defendant-employee, Zhang, signed, a several agreement that Dahua argued erroneously provided for payments to Zhang of $680,000 per month for sixteen (16) months 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 (16) 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 Dahua Technology-Zhang dispute with these considerations in mind, the First Circuit concluded that the District Court erred in granting summary judgment to Dahua on the basis that there was no genuine dispute that a mistake occurred in the drafting of the severance agreement. 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 First Circuit concluded that a trier of fact could conclude that Zhang’s receipt of $680,000 per month was a reasonable sum (and that he was not mistaken about the contract he agreed to). Additionally, given the fact that during negotiations prior iterations of the severance agreement varied the value of Zhang’s severance compensation by millions of dollars, together with the fact that the record was not clear as to the first severance agreement that was rejected, triable issues of fact were in dispute – all of which go directly to the weight or credibility of testimony, which the District Court could not weigh in summary judgment.

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