Labor & Employment Law Daily Wrap Up, CONTRACT CLAIMS—1st Cir.: Extrinsic evidence of parties’ intent required to resolve contract dispute, (May 13, 2025)

By Todd Harrison, J.D.

The dispute centered on whether an executive was entitled to $680,000 in severance payable over 16 months, or whether he was entitled to monthly payments of $680,000 over 16 months.

Vacating and remanding a district court’s finding that a severance provision contained a mistake that could not be fixed under Massachusetts law and was therefore required to be enforced “as written,” thus entering a judgment for a former executive in the amount of $10.2 million plus prejudgment interest, the First Circuit determined that the “inartfully drafted” severance provision was ambiguous, and the dispute should be resolved consistent with extrinsic evidence of the parties’ intent (Dahua Technology USA, Inc., v. Zhang, No. 24-1350 (1st Cir. May 12, 2025)).

Dahua is a United States subsidiary of Zhejiang Dahua Technology Co., a Chinese surveillance technology company, with offices in Massachusetts. In January 2016, the defendant in this case assumed an executive role at Dahua as its Chief Strategy Officer, Vice President, and President of North American and Enterprise Sales.

Employment agreement. A single-page employment agreement dated November 5, 2015, set forth the terms of the executive’s compensation, providing him with a base annual salary of $510,000 for a three-year employment term. This base salary was conditionally guaranteed, meaning it remained payable in full even if the executive was terminated for cause.

Removal. In mid-2017, Dahua’s Board of Directors decided to remove the executive from the day-to-day management of its North American business. Understanding its potential exposure, Dahua’s lawyers recommended providing the executive with a severance package, including additional compensation to entice him to release all claims against the company.

Separation, consulting agreements. Ultimately, the parties decided that the executive would take on a role as a senior corporate advisor for a period of two years, paying him a bi-weekly salary of $10,000, equating to $240,000 a year.

Dahua also presented the executive with a release agreement containing the following provision: Payments. In consideration for your execution, non-revocation and compliance with this Agreement, the Company agrees to make monthly severance payments to you in the amount of $680,000 for sixteen (16) months following the offer termination [d]ate (the "Severance Period"), payable subject to standard payroll deductions and withholdings on the Company's ordinary payroll dates over the Severance Period....

The executive began his advisor role on August 29, 2017. Dahua continued to pay him in monthly amounts consistent with his original employment agreement—at a rate of $510,000 annually—as well as his new salary.

Termination. On January 18, 2018, the executive received notice of his immediate termination. Attached to the notice was a new separation and release agreement which the executive refused to sign. Instead, he requested “acceleration of the agreed to severance amount” set forth in the initial release agreement. This request was followed by a formal demand letter asserting that Dahua was already contractually obligated to pay the executive over $11 million.

In response, Dahua’s counsel stated that she had “just learned” of a "scrivener's error in the Release Agreement," and that the parties had intended for the executive to receive a monthly severance payment of $42,000 for 16 months, totaling $680,000. Dahua requested that the executive execute a proposed amendment to the release agreement to correct the error. When the executive refused, Dahua initiated this litigation.

Lawsuit. Before the district court, Dahua requested a declaration that the release agreement was unenforceable on the grounds that the severance provision contained a scrivener’s error resulting from the mutual mistake of both parties. It sought reformation of the severance provision to reflect its intent to pay the executive a total of $680,000 over a period of 16 months. It also alleged that the executive breached the implied covenant of good faith and fair dealing by maintaining that the agreement, as written, reflected the intent of both parties.

The district court granted summary judgment for Dahua on all counts. The executive appealed to the First Circuit, which held that the district court erred in granting summary judgment to Dahua because there were several disputed issues of material fact relating to the viability of any mistake defense.

Remand. On remand, the case was assigned to a different judge and a bench trial was held. The district court determined that if Dahua made a drafting mistake, the executive had reason to know of the mistake at the time he executed the agreement. However, Dahua did not receive the relief it had sought because the court concluded that, under Massachusetts law, it could not reform or rescind the release agreement on grounds of unilateral or mutual mistake. Accordingly, the district court entered judgment against Dahua. However, it stopped short of entering judgment for the executive on his breach of contract counterclaim, instead soliciting additional briefing on whether the court had the authority to fashion an appropriate remedy as a matter of equity or whether it was required to enforce the agreement as written as a matter of law.

Dahua’s initial response proposed a handful of equitable remedies. It followed with another filing suggesting the court could "avoid the necessity of reforming the writing by viewing the issue as one of interpretation."

Ultimately, the district court rejected Dahua’s contract interpretation argument on waiver grounds and on the merits. It also found its proposed equitable remedies unpersuasive and entered judgment against Dahua on the breach of contract claim, which, including prejudgment interest, resulted in an award of $16,953,787.88. This second appeal followed.

Ambiguity? On appeal, the First Circuit focused its attention solely on Dahua’s argument that the district court had incorrectly concluded that the release agreement’s severance provision unambiguously promised the executive payments of $680,000 each month for a period of 16 months. In this court’s view, the release agreement made no such unambiguous promise.

Contract interpretation. Although much of the legal arguments surrounding this case concerned reformation of the severance provision, the court found that Dahua’s contract interpretation argument presented the logical starting point for its analysis. If Dahua is correct that the release agreement is unclear, explained the court, then the court must construe the meaning of the provision in accordance with extrinsic evidence of the parties’ intent.

In such a scenario, continued the court, the severance provision would be interpreted by considering evidence of the surrounding circumstances, making it unnecessary to analyze the availability of equitable tools—such as reformation or rescission—to rewrite or void the contract. Accordingly, the court opted to consider the merits of Dahua’s contention that the release agreement was ambiguous as a matter of law.

Waiver? Before addressing the merit’s of Dahua’s argument, the court addressed the executive’s contention that it had waived this argument altogether. Although Dahua had acknowledged at times on remand that it had disclaimed asserting ambiguity, it contended that the proper interpretation of the release agreement was nonetheless an open issue throughout the litigation.

In its final ruling, the district court agreed with the executive that it was too late for Dahua to claim ambiguity. However, it nonetheless proceeded to consider the ambiguity argument on the merits and determined that the severance provision was unambiguous as a matter of law. The executive argued that the ambiguity claim failed on appeal for the same reasons. The court disagreed.

Noting that theories not timely raised at trial generally cannot be considered on appeal, the court found the unique circumstances surrounding this case warranted an exception to the general rule. The court explained that Dahua’s ambiguity claim was fully briefed before the district court and it had addressed the argument on the merits.

Two interpretations. Turning to the merits of Dahua’s ambiguity argument, it contended that the severance provision lent itself to two reasonable interpretations: (1) that it required 16 monthly severance payments each in the amount of $680,000; or (2) that it required a total severance amount of $680,000 to be paid over the course of 16 months.

In its rejection of this argument, the district court reasoned that Dahua’s proposed alternative reading would require the court to ignore the term “monthly” in “monthly severance provision.” The court here found that such a reading construed the release agreement too narrowly, and the severance agreement could plausibly support either interpretation.

Single transaction. The court accepted Dahua’s unchallenged assertion that the release agreement and the subsequent 2017 employment agreement were part of a single transaction and should be treated as an integrated agreement.

In its analysis of just the severance provision, the district court adopted a reading that construed the word “monthly” as relating forward to modify “severance payments,” thus making “monthly severance payments” the direct object of the provision.

While such a reading is one reasonable interpretation, the court here found that the text also supported a construction in which "monthly" relates backwards to modify "make," thus making "severance payments" (as opposed to "monthly severance payments") the direct object of the provision.

“When read in this manner, it is unclear whether $680,000 describes the monthly or total severance payment, as one can just as well make "severance payments" in the total amount of $680,000 or monthly payments in that amount,” said the court, going on to state that the immediate context does not resolve the ambiguity.

Inconsistent construction. The two payment provisions in the 2017 employment agreement were inconsistent in their constructions, observed the court. The executive’s salary as a corporate advisor was set at $240,000, paid as $10,000 biweekly, for a term of two years. His severance, in contrast, was defined only in reference to the amount of $680,000 to be paid at specified intervals over a specified period. The court agreed with Dahua that the absence of a second dollar amount in the description of the severance payment added uncertainty over whether the parties meant for $680,000 to represent the total amount of severance or the periodic amount to be paid at monthly intervals.

Concluding that the provision was ambiguous, the court noted that the intent question was considered only in the context of resolving Dahua’s request for equitable remedies. Thus, it determined that the parties should be provided the opportunity to make arguments and, if necessary, to present additional evidence that bears on the correct interpretation of the ambiguous severance provision. Accordingly, the matter was remanded to the district court to construe the severance provision based on evidence concerning the parties' intended meaning.

Good faith and fair dealing. Finally, the court rejected Dahua’s claim that the executive breached the implied covenant of good faith and fair dealing, noting that there was nothing in the 2017 agreement that would impose a duty on the executive to agree to or even consider a modification of Dahua's obligations thereunder. Nor could Dahua sustain an implied covenant claim against the executive based on the possibility that he knew that Dahua did not intend for the release agreement to provide severance in the amount of $680,000 per month for sixteen months.

The case is No. 24-1350.

Judge: Aframe, S.

Attorneys: Daron L. Janis (Troutman Pepper Locke) for Dahua Technology U.S., Inc. Benjamin Flam (Gordon Law Group) for Feng Zhang.

Companies: Dahua Technology U.S, Inc.

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