The U.S. District Court for the District of Massachusetts has refused to reform a severance agreement entitling former executive to a $10.2 million severance payment, finding that the employer failed to establish the existence of a mutual mistake as to the severance payment amount.

United States District Court of Massachusetts

SUMMARY: (court decision – opens in PDF)

“Dahua Technology USA Inc. (‘Dahua’) brought this action against Feng Zhang to reform a severance term in an agreement (the ‘Release Agreement’) terminating Zhang’s executivelevel position at Dahua’s parent company, Zhejiang Dahua Technology Co., Ltd. (‘Zhejiang’). Zhang counterclaimed that Dahua’s failure to pay him the stated severance amount breached the Release Agreement. …

“As set forth above, the parties entered into a written contract. … Dahua’s complaint sought reformation of that contract based on mutual mistake and Dahua never previously contended or presented evidence that the contract was void ab initio. Dahua now contends that no contract was formed because there was a mutual mistake as to the severance amount, and, consequently, there was no meeting of the minds. … Dahua’s original position as to contract formation was correct, however, because whether a contract was formed is an objective standard under Massachusetts law.

“‘Although mutual assent is often misleadingly referred to as a “meeting of the minds,” the formation of a valid contract under Massachusetts law requires objective, not subjective[,] intent.’ … ‘Courts determine that mutual assent, not on the basis of what goes on inside the parties’ heads, but rather on the basis of what they say and do.’ Salem Laundry Co. v. New England Teamsters & Trucking Indus. Pension Fund, 829 F.2d 278, 280 (1st Cir. 1987). Intent is ‘what a reasonable man in the position of the other party would conclude his objective manifestations to be.’ …

“Here, the parties’ objective manifestation of their intent was that they entered into a contract by signing the written Release Agreement. As this court has found already, Dahua worked with its counsel to draft the contract, its counsel asked Zhang to review the contract, and its Director and Zhang signed the contract. … Dahua now inappropriately conducts an inquiry into the subjective intent of the parties to inquire if there was a ‘meeting of the minds,’ as opposed to what the parties said and did. Salem Laundry Co., 829 F.2d at 280.

“The First Circuit’s decision in Greene v. Ablon, 794 F.3d 133 (1st Cir. 2015), supports this court’s conclusion. In Greene, a doctor sued the hospital that was his former employer and his co-author alleging violations of trademark and copyright infringement pertaining to a book that Greene co-authored while employed by the hospital. … The hospital filed a counterclaim alleging inter alia that the doctor had violated the hospital’s intellectual property policy, which had been incorporated into numerous employment agreements signed by Greene. … Greene, relying on numerous contract defenses, argued that the hospital’s policy did not apply. …As relevant here, Greene alleged that ‘a valid contract was not formed at all because there was no “meeting of the minds[,]” [s]ince he did not know the IP policy existed.’ … The Greene court rejected this argument, relying on the objective standard in Massachusetts for contract formation, and concluding that Greene manifested the objective intent to be bound because he signed employment agreements incorporating the intellectual property policy by reference. ….

“Dahua argued at the post-trial hearing that Greene is distinguishable because the dispute here over the Release Agreement involves a material term. That distinction finds no support in Greene, which did not justify its enforcement of the intellectual property policy on the materiality of the term. Dahua also offers case law for the propositions that (1) a binding contract does not follow unless there is agreement as to all material terms, and (2) the severance amount is a material term in a severance agreement. … But none of Dahua’s offered cases speak to the circumstance here, where there is a written agreement with no missing terms. Accordingly, Dahua’s new argument that no contract was formed fails. …

“Given the lack of any contractual remedies, the court now considers whether there are any equitable theories to justify relief in favor of Dahua. …

“… Dahua urges the court to use its equitable powers to impose a quasi-contract where Zhang conferred benefits to Dahua and Dahua has already compensated Zhang for such benefits — and the court need only determine whether this compensation was appropriate. …
“However, ‘Massachusetts law does not allow litigants to override an express contract by arguing unjust enrichment.’ …

“Accordingly, the court finds a claim of unjust enrichment is unavailable here because there is a valid and enforceable contract between the parties. …

“Finally, this court’s inherent equitable powers do not support rewriting the contract or otherwise granting Dahua relief. … Here, Dahua is a sophisticated business entity that entered into an arm’s length deal; its Director signed a contract that the company’s counsel had drafted; and it now asks the court to set the contract aside and impose the court’s vision of an equitable term. But courts ‘should not attempt to ‘accomplish by judicial fiat what [a party] neglected to achieve contractually.’‘ Gen. Hosp. Corp. v. Esoterix Genetic Labs., LLC, 16 F.4th 304, 313 (1st Cir. 2021) (emphasis added) (citation omitted)).

“Dahua contends that the court has ‘inherent flexibility’ and ‘substantial equitable powers’ to prevent the allegedly unjust result of an extra $10.2 million in compensation being awarded to Zhang. … However, in none of the cases that Dahua cites did a court exercise equitable powers to override an express and unambiguous contract so that it could impose a remedy when the pleading party was not entitled to reformation or rescission. …

“There are no special circumstances here that justify the court fashioning equitable relief to reform an express contract. … Dahua does not allege — and it cannot — that Zhang made any misrepresentations in negotiations over the Release Agreement. …

“Accordingly, Dahua has not offered any authority from which the court may fashion an equitable remedy to override express contract terms here. …

“The court further finds that, where it is without the equitable authority to reform the parties’ Release Agreement, the terms of the Release Agreement control, including the severance provision in its entirety. Accordingly, the court enters judgment in Zhang’s favor as to his breach of contract counterclaim.”