Extrinsic Evidence Mandate for Ambiguous Severance Provisions: First Circuit Decision in Dahua Technology USA, Inc. v. Zhang

Introduction

This commentary reviews the Court of Appeals for the First Circuit’s May 12, 2025 decision in Dahua Technology USA, Inc. v. Zhang, No. 24-1350. The case arises from a multi-year dispute over whether Dahua’s one-page “Release Agreement” promised severance of $680,000 per month for sixteen months (totaling $10.88 million) or $680,000 total paid in sixteen monthly installments. After two rounds of district-court and appellate proceedings—and an eleven-day bench trial on the parties’ subjective intent—the First Circuit vacated the judgment for Feng Zhang and remanded for contract interpretation based on extrinsic evidence, concluding that the severance clause is legally ambiguous. It also affirmed dismissal of Dahua’s implied covenant claim.

Case Background and Key Issues

Parties: Dahua Technology USA, Inc. (“Dahua”), a U.S. subsidiary of Chinese electronics giant Zhejiang Dahua Technology Co., Ltd., and Feng “Frank” Zhang, Dahua’s former Chief Strategy Officer.

Underlying Dispute: Zhang claimed that Dahua breached its obligation to pay $680,000 per month for 16 months as severance. Dahua countered that the parties intended a total severance payout of $680,000, paid in sixteen installments of $42,500 each.

Procedural Posture: Dahua sued under diversity jurisdiction seeking reformation of the Release Agreement (alleging mutual or unilateral mistake) and claimed breach of the implied covenant of good faith and fair dealing. Zhang counterclaimed for breach of contract. The district court first granted Dahua summary judgment, then on remand (after this Court vacated that ruling) held mistake defenses barred because Dahua bore the drafting risk and refused to reform or rescind. The district court then awarded Zhang $10.2 million plus interest. Dahua appealed again.

Summary of the First Circuit’s Judgment

The severance clause—“monthly severance payments … in the amount of $680,000 for sixteen (16) months”—is ambiguous as a matter of law because it can plausibly be read either (a) to promise $680,000 per month or (b) to promise $680,000 total, paid monthly.
Because the clause is ambiguous, the district court must interpret it with recourse to extrinsic evidence of the parties’ intent rather than mechanically enforcing the larger payout or resorting to equitable reformation or rescission.
Dahua did not waive its argument on ambiguity. The issue was fully briefed and decided below; the Court of Appeals excused any earlier disclaimers in light of the district court’s request for supplemental briefing.
The district court’s alternative ruling—denying Dahua’s implied-covenant claim—was correct. Nothing in the 2017 Agreement imposed a duty on Zhang to consent to a post-signing amendment.
The judgment is vacated and remanded for a fact-intensive interpretation of the severance provision in light of extrinsic evidence; the implied covenant dismissal is affirmed.

Analysis

1. Precedents Cited

Nevor v. Moneypenny Holdings, LLC, 842 F.3d 113 (1st Cir. 2016) – standard for reviewing district court findings consistent with record support.
Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777 (1st Cir. 2011) – ambiguity is a question of law.
Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076 (1st Cir. 1989) – related-provision canon and context-based interpretation.
Homeowner’s Rehab, Inc. v. Related Corp. V SLP, L.P., 99 N.E.3d 744 (Mass. 2018) – contract construed to effectuate parties’ intent as a rational instrument.
Restatement (Second) of Contracts §§ 155, 212 – intersection of interpretation and reformation; use of background evidence to locate ambiguity.

2. Legal Reasoning

The Court employed the classic two-step interpretation test under Massachusetts law:

Ambiguity Inquiry: “A phraseology supports reasonable difference of opinion” if it can bear more than one plausible meaning. Here, “monthly severance payments … in the amount of $680,000 for sixteen months” can grammatically and contextually refer either to (i) “each monthly installment is $680,000” or (ii) “the total severance is $680,000, paid in monthly installments over sixteen months.”
Extrinsic Evidence: Once ambiguity is established, courts consider peripheral evidence—drafting history, internal emails, negotiations, industry practice—to determine the parties’ actual intent. Because the parties themselves proffered extensive evidence at bench trial regarding their understanding, the district court must now interpret rather than reform or rescind.

The Court rejected the district court’s attempt to bypass interpretation by deeming the text unambiguous. It further held that Dahua’s late-raised ambiguity argument was not waived: the district court expressly invited it in supplemental briefing, and our “occasional exception” to waiver rules applies, particularly for pure questions of law.

3. Impact on Future Cases

Reinforces that ambiguities in payment provisions—especially where large sums hinge on modifiers like “monthly,” “per,” or “total”—will trigger extrinsic-evidence inquiries, not mechanical enforcement of one plausible reading.
Counsels careful contract drafting: avoid placing critical numbers adjacent to terms of frequency or duration without explicit clarifying language (e.g., “a total of $680,000, payable in sixteen monthly installments”).
Clarifies the boundary between interpretation and reformation: ambiguous texts invite interpretation based on intent, whereas reformation is reserved for true scrivener’s errors when a prior agreement is established.
Reaffirms Massachusetts law’s allowance to consult limited parol evidence at the ambiguity-determination stage.

Complex Concepts Simplified

Contractual Ambiguity

A term is ambiguous if it can reasonably bear two different meanings when read in context.

Extrinsic Evidence

Any information outside the four corners of the document—prior drafts, emails, negotiations, trade usage—used to resolve genuine ambiguities.

Reformation vs. Interpretation

Interpretation: Deciding what the existing words mean, often via extrinsic evidence if ambiguous.
Reformation: Equitably rewriting a contract to match the parties’ actual, previously agreed-upon bargain when a scrivener’s error occurred.

Implied Covenant of Good Faith and Fair Dealing

An obligation that neither party will act to deprive the other of the contract’s intended benefits; it cannot create new duties beyond the written terms.

Conclusion

The First Circuit’s decision in Dahua Technology USA, Inc. v. Zhang establishes that ambiguous severance clauses—especially those using numeric amounts alongside timing modifiers—cannot be resolved by labeling one reading “plain.” Instead, Massachusetts law requires a fact-intensive interpretation using extrinsic evidence to ascertain the actual understanding of the parties. The ruling underscores the importance of precise drafting and illuminates the interplay between interpretation and equitable remedies in contract law. On remand, the district court must determine whether the parties intended $680,000 per month or $680,000 total, delivering a contract enforcement outcome true to their meeting of the minds.