When Words Cost Millions: A Cautionary Tale of Severance Agreement Ambiguity
The Law Junkie in us was on overdrive reading a recent case from Massachusetts. This case preaches the obvious. Be CLEAR when drafting a severance agreement. REALLY clear! Words have meaning, and that meaning can, well, make or break your business.
As employment counsel representing businesses throughout New England, we frequently advise clients on the drafting and negotiation of executive agreements—especially those involving severance terms. We litigate them also. We’ve been following a case from Massachusetts ever since the district court awarded over 10 million dollars to an executive in a breach of contract case. The First Circuit’s decision in Dahua Technology USA, Inc. v. Zhang, No. 24-1350 (1st Cir. May 12, 2025), underscores the need for clarity in severance agreements and serves as a cautionary tale for employers handling high-stakes executive separations.
What is a Severance Agreement?
A severance agreement is an agreement that governs the terms when an employer and employee sever the employment relationship. Its that simple. But can be complex. Some laws, like the Older Workers Benefits Protection Act, require specific language in severance agreements where employees over 40 are release age discrimination claims. The Equal Employment Opportunity Commission has a good primer here on severance agreements, and we could talk for hours about them. For this article though, we want to focus on the money aspect (the fancy term is “consideration”) or the quid pro quo.
The $10 Million Misunderstanding
The case arose from a dispute over the severance terms offered to Feng “Frank” Zhang, a former executive of Dahua Technology USA, Inc., the U.S. subsidiary of a Chinese surveillance technology company. In negotiating Zhang’s exit, the company prepared a separation agreement that stated:
“The Company agrees to make monthly severance payments to you in the amount of $680,000 for sixteen (16) months…”
Zhang, unsurprisingly, interpreted this to mean he would receive $680,000 each month for 16 months—a total of $10.2 million. Dahua claimed it was a scrivener’s error and that the intended severance was $680,000 in total, paid over 16 months in equal installments.
Litigation followed, with Dahua seeking reformation of the contract based on mutual or unilateral mistake. That means they wanted the court to rewrite the contract to what the parties agreed to (but didn’t write very well). The trial court, however, concluded that although a mistake may have occurred, Dahua—having drafted the agreement with the aid of legal counsel—bore the risk of that mistake under Massachusetts law. The court enforced the agreement “as written” and awarded Zhang $10.2 million, plus prejudgment interest exceeding $6.7 million.
The First Circuit Steps In
On appeal, the First Circuit Court of Appeals vacated the judgment, holding that the severance provision was ambiguous and that the lower court erred in enforcing it without considering extrinsic evidence. When a contract is ambiguous, courts may consider external facts to interpret the parties’ intended meaning. The panel found both interpretations—monthly payments of $680,000 and monthly payments totaling $680,000—plausible when read in context.
Key to the court’s ruling was its emphasis on standard contract interpretation principles:
- Context matters: The court noted that the severance agreement was executed alongside a new employment agreement for Zhang’s consulting role, under which he was paid $240,000 annually. A $10.2 million severance package seemed out of step with the overall compensation structure.
- Grammar isn’t enough: The appellate court found “$680,000 in monthly severance payments” could reasonably be interpreted in more than one way.
- Surrounding negotiations are relevant: The First Circuit held that courts may consider limited extrinsic evidence to assess ambiguity under Massachusetts law.
Finding ambiguity, the court remanded for a factfinder to interpret the contract based on the parties’ intent.
Key Takeaways for Employers
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Ambiguity Is Expensive
This case shows how unclear severance terms can lead to severe financial consequences, especially with high-level employees. An extra layer of review, including input from employment counsel, is not just prudent but essential.
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Precision in Compensation Terms
Employers should clearly distinguish between the total severance amount and the periodic payment structure. For example:
“Employee shall receive total severance of $680,000, paid in sixteen equal monthly installments of $42,500 each.”
This eliminates ambiguity and forecloses conflicting interpretations.
Final Thoughts
From an employer’s standpoint, Dahua v. Zhang is a sobering reminder of the importance of precise contract drafting. The decision confirms courts won’t save employers from unclear terms—especially when the employer drafted the agreement.
In practice, we advise employers to:
- Use plain, explicit terms for all monetary provisions;
- Clearly identify whether stated amounts are per-period or total sums;
- Conduct internal reviews of draft agreements before presenting them to employees; and
- Engage employment counsel early in negotiations involving senior executives or sensitive transitions.
The cost of ambiguity here was nearly $10 million. A few extra lines of clarification could have saved years of litigation—and the seven-figure price tag that came with it.
Minchella Law’s employment team can help with drafting or reviewing severance and executive employment agreements. We help employers across New England, New York and New Jersey avoid the pitfalls like what happened to Dahua.
