Flower City Painting Contractors, Inc. v. Gumina Construction Company , 591 F.2d 162 ( 1979 )

GURFEIN, Circuit Judge:

This is an action for breach of contract, entertained in the District Court for the Western District of New York (Hon. Harold P. Burke, Judge) by virtue of the diversity of citizenship of the parties.¹ 28 U.S.C. § 1332. Plaintiff-appellant, Flower City Painting Contractors, Inc. (“Flower”) is a newly formed painting contracting firm in Rochester, New York, owned and managed by black minority personnel. Defendantappellee, Gumina Construction Company (“Gumina”) is an Ohio company with its principal place of business in Lorain, Ohio.

Gumina entered into a prime contract with the FIGHT Village Housing Development Fund Company, Inc., for the construction of a garden type apartment project called “FIGHT Village,” on March 12, 1973. The project was federally funded and developed under the auspices of the Federal Housing Authority of the Department of Housing and Urban Development (“HUD”). Pursuant to Executive Order No. 11246, which prohibits employment discrimination by Government contractors, HUD regulations and the terms of the prime contract required the prime contractor to undertake an affirmative action program that included efforts to recruit and hire minority subcontractors. HUD Contract Compliance Handbook 8000.6 at 27 (1972). Compliance was a condition of the contract.

Part of Gumina’s affirmative action obligation was satisfied by its award of a subcontract for painting in the FIGHT Village to Flower on April 16, 1973. As indicated by the cost breakdown summary sheet attached to the prime contract, the total anticipated cost of painting and decorating the entire FIGHT project was to be $101,-000. This estimation of cost was significant, since an excess of cost in one aspect could have caused a cost overrun that would cut into the prime contractor’s profits. The subcontract executed with Flower provided that Flower was to be paid $98,499.84 for its work, a sum that was roughly only $2500 less than the maximum allotted for painting and decorating the entire project.

The terms of the Gumina-Flower subcontract included the language of Flower’s original bid on the subcontract which was incorporated in haec verba as Schedule A of the subcontract. That Schedule reads as follows:

“SCHEDULE A”

The painting of the above mentioned project in accordance with the painting specifications and plans for this project.

1. One bedroom units $*335.00 per unit $*17,420.00

2. Two bedroom units $*371.00 per unit $*28,196.00

3. Three bedroom units $*428.00 per unit $*29,960.00

4. Four bedroom units $*477.58 per unit $*22,923.84

A Total of: $*98,499.84

Please note: price given reflects no bonding requirement and a non-union job operation.

The subcontract also incorporated by reference the prime contract, drawings, addenda, and specifications, as well as modifications subsequently issued. Indeed, Schedule A made specific reference to the contract specifications and plans in defining the scope of the subcontractor’s work. The subcontract further provided that the subcontractor would “faithfully observe all requirements and conditions set forth by plans and specifications on file at the F.H.A. Office in Buffalo, N.Y. . . .,” and that these documents were to be “available for inspection by the Subcontractor upon his request.”

On March 18, 1974, nearly one year after Flower entered into the subcontract, it asserted in a letter to Gumina that the contract required Flower to paint interior walls of the individual apartment units only and that Flower was not obligated to paint exteriors or common buildings.² On March 25, 1974, Flower received from Gumina a copy of Article II of the subcontract with additional explanatory language typed in as a reminder of obligations which Gumina insisted that Flower had under its subcontract. This notation stated: “It is further understood that this contract includes all exterior work, (encompasses all work, within specs and drawings) except exterior siding. The community building is also a part of this contract.” On March 29, 1974, the president of Flower submitted to Gumina an itemization of additional costs for this “exterior work,” claiming that it was not required to do the painting of apartment laundry rooms, storage rooms, and hallways, as well as of exterior doors, trim and certain common buildings.³ On April 4, 1974 (the letter was erroneously dated March 4), Gumina responded to Flower’s demand for extra payments by reiterating that the exterior work specified by Flower as requiring additional payment, was work which had already been agreed upon. Gumina, in the same letter, though the work had not yet begun, cancelled the contract. Appellant sued Gumina for damages.

At trial, Gumina defended its removal of Flower on the ground that the latter had misinterpreted the contract, and that by insisting upon extra payment for the painting of exteriors Flower had refused to comply with the terms of — and had thereby repudiated — the existing subcontract. Flower maintained the converse position: that Gumina had unilaterally attempted to enlarge the scope of Flower’s obligation under the contract by requiring work outside the individual “unit” interiors. The trial court accepted the contract interpretation offered by Gumina. It found, despite Flower’s contentions that it had been hired to paint only the walls in the “units,” that, on the contrary, neither the subcontract nor the specifications incorporated by reference excluded common hallways, storage areas, laundry rooms, or exterior surfaces of FIGHT Village. The court determined that the specifications required the painting of “ ‘all surfaces except those specifically excluded.’ ”

The court held that Flower committed a breach of contract “by asking for extra pay for work it was obligated to do under its contract.” It found that “Flower City unequivocally declared its refusal to perform according to the contract” and that “cancellation was the proper response by Gumina Construction.” It was on that basis that the complaint was dismissed after trial.

On this appeal, the defendant contends that an alternative ground upon which to uphold dismissal of Flower’s suit is that no subcontract was actually formed between Flower and Gumina because there was no “meeting of the minds.” This issue was not expressly considered by the District Court, although the assumption that a contract existed as interpreted by Gumina is implicit in its ruling.

If we hold Flower strictly to its obligation to recognize that the specifications were part of the subcontract, then its claim for additional payment as a condition of performance was unjustified, as Judge Burke found. This, in turn, would raise the question whether a refusal to perform part of an alleged contract, except in accordance with one’s own interpretation, is a repudiation. If so, we would then have to decide whether such a repudiation by Flower was sufficiently material to be treated as a justification for unilateral rescission by Gumina. Thus, if we adopted the approach of the court below that there was a contract, even aside from the issue of what were its obligations, we would have considerable difficulty in weighing the correctness of the conclusion of law that there had been a repudiation sufficient to justify an immediate unilateral rescission.

We think, however, that this thorny problem need not be reached. Rather, we have concluded — using the objective criterion of judgment — that there was no meeting of the minds in the first instance and that, hence, there never was a contract enforcible by either party.

Viewing the subcontract itself as written, both Flower’s and Gumina’s interpretations of the document are plausible. The description of the subject matter of the contract in Schedule A in terms of “units” and the fact that the total bid listed is the aggregate of the bids on the individual units suggest that nothing more was required to be painted than the actual units themselves. On the other hand, the incorporation of the specifications with their delineation of exterior painting chores and the use of the word “project” in Schedule A indicate that the scope of the work encompassed all painting in FIGHT City.

Resolution of this ambiguity might be effected by construing the contract on the assumption that it incorporated the habitual or customary practice of the construction industry in Rochester, New York, that painting subcontracts be awarded on an entire project basis.

Such usage, if operative, may be proved by parol, as was done here. See, e. g., Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc.2d 720, 730-31, 304 N.Y.S.2d 191 (Sup.Ct.1969). But proof of the usage is not enough by itself to establish the meaning of the contract, for “[a] party cannot be bound by usage unless he either knows or has reason to know of its existence and nature.” Restatement (First) of Contracts § 247, comment b. See Walls v. Bailey, 49 N.Y. 464 (1872).

In an ordinary situation involving the painting subcontract on a construction job in Rochester, the court could find as a fact that a painting contractor “knows or has reason to know of [this usage’s] existence and nature.” It seems clear enough that Flower actually did not know the usage, as its President testified, and the court made no finding to the contrary. The question whether Flower had “reason to know” is the issue.

Flower was brought into the picture by the imposition on the contractor of an affirmative action program. While competence to do the job must have been the assumption of the Regulation, experience in the trade was not. Flower was a neophyte minority painting contractor. This was its first substantial subcontract on a construction job. It would be unrealistic to hold it strictly to a “reason to know” standard of trade usage.

The consequence of ruling that Flower cannot be held to trade usage is recognition, however, that the contract document could represent two different understandings of what the subject matter embraced. This means that Gumina, as well, was not bound since it takes two to make a contract. Unfortunately, there was no contract to enforce in favor of Flower, as there would have been no contract to enforce against Flower if Gumina had been the plaintiff in an action for breach. And we cannot say that either party acted so unreasonably as to justify construing the ambiguity in the contract against it. Each party, in fact, held a different and reasonable view of the undertaking, Flower on the basis of its literal reading of the word “units” and Gumina because of its suppositions concerning trade practice and its awareness that Flower was to be paid virtually the entire sum allocated to painting the FIGHT City project.⁴

Though the setting is new, the problem is old. In two nineteenth century cases, Raffles v. Wichelhaus, 159 Eng.Rep. 375 (Ex. 1864) (the famous “Peerless” case) and Kyle v. Kavanagh, 103 Mass. 356 (1869), courts, when faced with an arguably material contract term that could mean or represent two different things, found that no contract existed. See O. Holmes, The Common Law 309-10 (1881).⁵ As Judge Pollack noted in Oswald v. Allen, 285 F.Supp. 488, 492 (S.D.N.Y.1968), aff’d, 417 F.2d 43 (2d Cir. 1969), the essence of the Raffles opinion was that “neither party had reason to know of the latent ambiguity. . . .” The rule of Raffles and Kyle was adopted and more fully formulated in the Restatement (First) of Contracts § 71(a).

If the manifestations of intention of either party are uncertain or ambiguous, and he has no reason to know that they may bear a different meaning to the other party from that which he himself attaches to them, his manifestations are operative in the formation of a contract only in the event that the other party attaches to them the same meaning. [Emphasis added.]

Accord, Oswald v. Allen, supra; Julius Kayser & Co. v. Textron, Inc., 228 F.2d 783, 789-90 (4th Cir. 1956); Hayford v. Century Insurance Co., 106 N.H. 242, 209 A.2d 716, 718 (1965); Wright v. Dutch, 140 Cal2d 891, 296 P.2d 34 (Cal.App.1956); Restatement (Second) of Contracts § 21A (tent, draft); 3 Corbin on Contracts § 599, at 593-97; 1 Williston on Contracts § 95, at 344-48 (3d ed. Jaeger); Young, Equivocation in Agreements, 64 Colum.L.Rev. 619, 621 (1964); see Dadourian Export Corp. v. United States, 291 F.2d 178, 187 & n. 4 (2d Cir. 1961) (Friendly, J., dissenting).

We affirm the judgment of dismissal on the ground that no enforcible contract ever came into existence.

The dissenting opinion, finding a contract as interpreted by Flower, relies upon some testimony by Ellison, president of Flower, that he was told by the superintendent for Gumina in March 1974 — almost a year after the putative “contract” was signed — that there had been some “changes” since the signing and that the Gumina superintendent, therefore, had to add a “piece of contract document.” The dissenting opinion finds that this bit of testimony indicated that Gumina was “redefining the scope of the work by a ‘further understanding’ ” and concludes that “[cjlearly, Gumina made an initial mistake and then tried to get Flower to change the contract.” Dissent op. at 168. But we are not the trial court, and this conclusion rests upon an opinion as to the credibility of a witness whom Judge Burke heard, and whom we have never seen. If Judge Burke had believed this parol evidence, it would have amounted to an admission regarding the construction of the contract by Gumina. Although this testimony was admitted, Judge Burke found, nevertheless, that the “piece” of document Flower received from Gumina later in March was “a copy of Article II of the subcontract, with additional explanatory language as a reminder of obligations Flower City had under its subcontract.” Finding No. 14 [emphasis added]. One may assume, therefore, that, in reaching Finding No. 14, Judge Burke rejected Ellison’s testimony to the contrary.

The judgment is affirmed.

1 . The jurisdictional basis for consideration of this suit was not discussed below. The complaint asserted federal question jurisdiction only under 28 U.S.C. § 1343 with regard to claims under 42 U.S.C. §§ 1981 and 1983 and Title VI of the Civil Rights Act of 1964, but the District Judge’s findings make it evident that there is actual diversity of citizenship as well as the requisite jurisdictional amount.

The trial court did not make any specific rulings with respect to plaintiffs civil rights claims, which do not appear to have entered into the trial. On this appeal, plaintiff argues that the trial judge denied it the opportunity to present evidence on the discrimination issue. The record reveals no effort to present such a case. The contention that the trial judge was unfair is without merit. We do not consider the appropriateness of the statutory provisions the plaintiff invokes as a basis for its discrimination cause of action.

2 . There is some indication that this opening salvo was preceded by discussion. See infra.

3 . The extra work was estimated to cost an additional $14,545.17, about 15 percent of the subcontract price.

4 . We do note, however, that Flower’s people expected to make a profit of about $60,000 on this $98,000 contract, which may be some indication that their view of the scope of the work was unrealistic.

5 . There is an even earlier case in which the problem was considered at some length by Justice Story sitting as Circuit Justice. In Hazard v. New England Marine Ins. Co., 11 Fed.Cases 934 (C.C.D.Mass.1832) (No. 6,282), the question arose as to whether the term “coppered ship” in a marine insurance contract was to be understood according to the usage in the shipowner’s home port of New York or according to usage in the underwriters’ city of Boston: the underwriters, defending a suit on the contract, maintained that the plaintiff had not provided a coppered ship as promised, while the plaintiff argued that the ship was coppered as he understood it. At one point in Justice Story’s instructions to the jury, he charged that if the plaintiff and the underwriters had differing understandings of the term “coppered” and if neither had cause to know of the other’s understanding, then no contract should be deemed formed because there was mutual mistake. Id. at 936-37.

On appeal, the judgment for the underwriters was reversed. Hazard’s Admin, v. Marine Insurance Co., 33 U.S. (8 Pet.) 557 (1834). The Supreme Court reasoned that underwriters should be presumed to be aware of the usages of their clients as a matter of their business. The “meeting of the minds” question was not extensively considered in the reported oral argument; the participants viewed the real choice to be between accepting the shipowner’s or the underwriters’ interpretations and enforcing the contract one way or another.