## Facts

- Ophthalmic Surgeons, Ltd. (OSL), a medical practice, retained Paychex, Inc. to provide payroll services, including direct deposit.
- The parties operated under a written 1994 direct-deposit agreement governed by New York law authorizing Paychex to withdraw from OSL’s bank account “as specified by [OSL], such amounts as are necessary to pay its employees.”
- OSL designated its office manager, Carleen Connor, as the payroll contact who regularly communicated payroll amounts to Paychex.
- Over roughly 2001–2006, Connor instructed Paychex to pay her amounts exceeding her authorized annual salary; Paychex processed the payments and withdrew corresponding funds.
- OSL received payroll reports from Paychex but did not identify the overpayments until Connor’s duties were assumed by another employee.
- OSL alleged Paychex overpaid Connor by $233,159 and sued, ultimately proceeding on a breach-of-contract theory.
- The district court granted summary judgment to Paychex based on unambiguous contract language and Connor’s apparent authority; OSL appealed.

## Issues

1. Whether the 1994 agreement required Paychex to verify that payroll amounts specified by OSL’s payroll contact were “necessary” (i.e., matched authorized pay rates) before withdrawing and disbursing funds.
2. Whether Connor had apparent authority to direct Paychex regarding payroll amounts, including her own compensation.
3. Whether Paychex breached the implied covenant of good faith and fair dealing by failing to detect or warn OSL about suspicious payroll overpayments.

## Decision

- The First Circuit affirmed summary judgment for Paychex.
- The contract language was unambiguous and did not impose an affirmative duty on Paychex to audit or verify the correctness of client-specified payroll amounts.
- Connor had apparent authority to provide payroll instructions to Paychex, and Paychex reasonably relied on OSL’s manifestations of that authority.
- The implied covenant of good faith and fair dealing could not be used to impose monitoring and fraud-detection duties inconsistent with the agreement’s express allocation of responsibilities.

## Legal Principles

- Under New York contract law, clear and unambiguous terms control; extrinsic statements about expectations cannot vary unambiguous contract language.
- Contract language authorizing withdrawals “as specified by [the] client” generally permits reliance on client instructions and does not, without more, create a duty to verify internal authorization or necessity.
- Apparent authority depends on the principal’s manifestations to the third party and the third party’s reasonable reliance; a principal that designates an employee to interact with a vendor and fails to communicate limits may be bound by that employee’s instructions.
- The implied covenant of good faith and fair dealing cannot create obligations that contradict or expand the parties’ express contractual duties.

## Conclusion

The court held that Paychex performed according to an unambiguous payroll agreement by acting on payroll instructions provided by OSL’s designated payroll contact, that Connor’s instructions bound OSL under apparent-authority principles, and that OSL could not use the implied covenant to shift losses from its employee’s misconduct and its own failure to review payroll reports onto Paychex.


Ophthalmic Surgeons, Ltd. v. Paychex, Inc., 632 F.3d 31 (1st Cir. 2011)