Dahua Technology USA, Inc. v. Zhang

Court of Appeals for the First Circuit
988 F.3d 531 (2021)

ELI5:

Rule of Law:

Summary judgment is inappropriate in a contract reformation case based on mistake when genuine disputes of material fact exist regarding whether the non-mistaken party knew or should have known of the error, or whether the alleged error constituted a plausible bargain given the consideration exchanged.

Facts:

Dahua Technology hired Feng Zhang in 2015 as a high-level executive with a compensation package that included salary and 100,000 shares of stock.
In August 2017, Dahua terminated Zhang's employment and initiated negotiations for a separation agreement, seeking a release of claims, confidentiality, and a non-compete covenant.
During the drafting process, a Dahua employee accidentally entered '$680,000' into a blank space designated for 'monthly' severance payments, rather than designating it as the total severance amount.
The final signed agreement obligated Dahua to pay Zhang '$680,000' monthly for 16 months, totaling approximately $11 million, rather than the $680,000 total intended by Dahua.
Zhang signed the agreement, which required him to surrender his rights to the company stock (valued around $942,000) and adhere to strict confidentiality and non-disparagement clauses.
Dahua paid Zhang approximately $62,500 per month (consistent with the total amount calculation) for four months.
Zhang subsequently demanded Dahua pay the full monthly amount stipulated in the written contract, claiming the higher value was in exchange for his stock and silence.

Procedural Posture:

Dahua sued Zhang in the United States District Court for the District of Massachusetts seeking declaratory judgment to reform the contract.
Zhang counterclaimed against Dahua for breach of contract.
Both parties filed cross-motions for summary judgment.
The District Court granted summary judgment in favor of Dahua, reforming the contract to the lower amount, and denied Zhang's motion.
Zhang appealed the decision to the United States Court of Appeals for the First Circuit.

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Issue:

Is summary judgment appropriate for an employer seeking to reform a contract containing a clerical error regarding severance payments, where the employee contends the higher amount was intentional compensation for surrendering stock and rights?

Opinions:

Majority - Lynch

No, summary judgment is not appropriate because genuine disputes of material fact exist regarding the viability of the mutual and unilateral mistake defenses. The court vacated the district court's ruling, reasoning that while Dahua certainly made a clerical error, it is not indisputable that Zhang shared that mistake or knew of it. Under Massachusetts law, which applies because the contract's choice of Virginia law lacked a substantial relationship to the parties, a 'mistake' defense requires clear proof. Here, a reasonable jury could conclude that Zhang believed the high payout was a valid offer in exchange for surrendering his valuable stock and agreeing to confidentiality terms that Dahua highly prioritized. Because the negotiation history and the value of the surrendered stock are contested, the court cannot determine as a matter of law that Zhang was effectively taking advantage of a known typo. These credibility determinations belong to a jury.

Analysis:

This decision emphasizes the rigorous standard required to obtain summary judgment in contract disputes involving 'scrivener's errors' or clerical mistakes. While courts generally allow reformation of contracts to correct obvious typos, this case demonstrates that if the 'error' is contextually plausible—for example, if the recipient gave up significant consideration like valuable stock or the right to act as a whistleblower—a court cannot unilaterally fix the contract without a trial. It serves as a warning to drafters that significant typos may be enforced if the counterparty can plausibly argue they accepted the terms as a valid, albeit generous, bargain.

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