Massachusetts court finds employer mistake in severance agreement entitles employee to substantial severance payments.

United States District Court District of Massachusetts

SUMMARY: (court decision – opens in PDF)

“Dahua Technology USA Inc. (‘Dahua’), a subsidiary of Zhejiang Dahua Technology Co., Ltd. (‘Zhejiang’), brought this action against Feng Zhang to reform an agreement terminating Zhang’s executive-level position at Zhejiang (the ‘Release Agreement’). Dahua alleged that either mutual or unilateral mistake warranted reformation of the severance amount provided by the Release Agreement and that Zhang’s attempt to enforce the mistaken term breached the contract’s implied covenant of good faith and fair dealing. Zhang counterclaimed that Dahua’s failure to pay him the stated severance amount breached the Release Agreement. …

“Dahua contends that both parties entered into the Release Agreement with the understanding that Dahua would pay Zhang a total of $680,000 in severance — not $680,000 per month for sixteen months as written — and that reformation is therefore warranted based on mutual mistake. At a minimum, Dahua argues that the company mistakenly listed $680,000 as the monthly payment, and that even if Zhang was not mistaken, he knew or should have known it was a drafting mistake by Dahua and thus reformation of the severance amount based on unilateral mistake is available.

“Although Dahua argues that there was a verbal agreement for $680,000 in severance, it points to no specific oral agreement. …

“In sum, the court finds that there was no prior oral agreement with Dahua concerning Zhang’s separation of employment from Zhejiang. The court ‘will not decree reformation unless [it] is convinced that the parties expressed agreement and an intention to be bound in accordance with the terms that [it is] asked to establish and enforce.’ … Accordingly, the court is unable to reform the written agreement to a prior agreement of the parties here and thus will enter judgment for Zhang and against Dahua on Dahua’s claim for reformation. …

“In his counterclaim, Zhang asks the court to find Dahua breached the Release Agreement by not paying him the $680,000 per month severance set forth in the document. Dahua raises affirmative defenses of mutual or unilateral mistake, contending that Dahua’s last offer — made in the form of the Release Agreement and the 2017 Employment Agreement — contained a mistake and that Zhang was either also mistaken or knew or should have known it was a mistake when he accepted the offer.

“If successful, this defense does not support reformation of the contract but rescission. …

“Dahua has established that it made a mistake when setting forth the severance payment as $680,000 per month for sixteen months rather than $680,000 payable over sixteen months. …

“The discrepancy between $10,880,000 (the amount in the agreement) and the initial zero dollar offer, with no discussions of intermediate offers, supports Dahua’s claim of mistake. …

“Dahua has also established that the mistake was mutual or that Zhang had reason to know of the mistake. …

“Dahua’s defense fails, however, because recission of a contract is available only to a contracting party that did not bear the risk of mistake. …

“Here, Dahua bore the risk of mistake in the Release Agreement. Dahua drafted the Release Agreement with a full panoply of lawyers. … Accordingly, Dahua bore the risk of mistake as to the dollar amount in the Release Agreement.

“The court finds further that the risk of mistake is properly allocated to Dahua based on the totality of circumstances. … Accordingly, Dahua’s defense fails where at formation it bore the risk of mistake.

“However, before entering judgment, the court seeks further briefing from the parties on the following question: Having found that there was no oral agreement in 2017 prior to the signed documents, that the parties were mutually mistaken as to the severance term in the Release Agreement, but that Dahua’s defense fails because Dahua bore the risk of such mistake, does the court have authority to fashion an appropriate remedy as a matter of equity or must the court enforce the agreement as written as a matter of law? …

“For the foregoing reasons, the court will enter judgment against Dahua on its claims for reformation and breach of the implied covenant of good faith and fair dealing. The court reserves judgment as to Zhang’s breach of contract counterclaim against pending further briefing from the parties. The parties shall promptly confer and submit a proposed briefing schedule on the question posed by the court.”