Colfax Envelope Corporation v. Local No. 458-3m, Chicago Graphic Communications International Union, Afl-Cio

POSNER, Chief Judge.

This appeal in a suit over a collective bargaining agreement presents a fundamental issue of contract law, that of drawing the line between an ambiguous contract, requiring interpretation, and a contract that, because it cannot be said to represent the agreement of the parties at all, cannot be interpreted, can only be rescinded and the parties left to go their own ways. Colfax, the plaintiff, is a manufacturer of envelopes. It does some printing of its envelopes, and the seventeen employees who do -the printing are represented by the defendant union. Colfax has two printing presses. One prints 78-inch-wide sheets in four colors. The other prints 78-inch-wide sheets in five colors, but most of the .time Colfax prints only four-color sheets on it.

Colfax has so few printing employees that it does not bother to participate in the collective bargaining negotiations between the union and the Chicago Lithographers Association, an association for collective bargaining of the other Chicago printing companies whose employees are represented by this union. Instead, whenever the union and the CLA sign a new collective bargaining agreement, the union sends Colfax a summary of the changes that the new agreement has made in the old one. If Colfax is content with the changes, the union sends it a copy of the complete new agreement, which Colfax signs and returns. If Colfax doesn’t like the terns negotiated by the CLA, it is free to do its own bargaining with the union.

The collective bargaining agreements specify minimum manning requirements for each type of press used by the printers. The agreement in force between 1987 and 1991 fixed those minima as three men for four-color presses printing sheets 45 to 50 inches wide and four men for four-color presses printing sheets wider than 50 inches. Five-color presses printing sheets more than 55 inches wide required five men unless only four colors were printed, in which event only four men were required. The upshot was that, under thése agreements, all of which Colfax had signed, Colfax had to man each of its presses (which were 78-inch presses) with four men except on the rare occasions when it printed five-color sheets on its second press, and then it had to add a man.

In 1991 the union negotiated a new agreement with the CLA and sent a summary of the changes to Colfax. The letter enclosing the summary asked Colfax to indicate whether it agreed to the terms in,the summary. (This may have been a departure from past practice, in which Colfax signed the complete agreement rather than the summary, but if so neither party makes anything of it.) In a section on manning requirements, the summary lists “4C 60" Press — 3 Men” and “5C 78" Press — 4 Men.” Believing (in part because union members who claimed to be familiar with the new agreement had told Colfax that Colfax would really like the changes in it) that this meant that all presses operated as four-color presses would now require only three men to man them, Colfax’s president and majority shareholder, Charles Patten, signed the union’s letter, indicating acceptance of the terms in the summary. Later a copy of the actual agreement arrived, but it contained a crucial typo, which supported Patten’s understanding of the summary. When a corrected copy of the agreement finally arrived, the manning requirements stated in it were different from what Patten had understood from the summary. Four-color presses between 46 and 60 inches required three men, but all four-color presses over 60 inches required four men. The changes had not benefited Colfax at all, and because it was under competitive pressure, it would have liked to negotiate better terms. Patten refused to sign the agreement but the union took the position that Colfax was bound to it by its acceptance of the summary.

Colfax brought this suit under section 301 of the Tafl>-Hartley Act, 29 U.S.C. § 185, for a declaration that it has no collective bargaining contract with the union because the parties never agreed on an essential term— the manning requirements for Colfax’s printing presses. The union counterclaimed for an order to arbitrate. The union’s position was that Colfax had accepted the new agreement, which requires arbitration of all disputes “arising out of the application or interpretation of this contract.” The district judge granted summary judgment for the union, concluding that the reference to the new manning requirement for a four-color 60-inch press in the summary of changes that Colfax had accepted referred unambiguously to 60-inch presses and had no application to any other presses, such as Colfax’s 78-inch presses. Colfax has appealed.

One way to describe the issue that divides the parties is that they disagree about the meaning of the term “4C 60" Press — 3 Men.” Colfax believes that, it means four-color presses printing sheets 60 inches and over, while the union believes that it means four-color presses 60 inches and under (down to 45 inches). Remember that the previous agreement had allowed the use of three-man crews on four-color presses between 45 and 50 inches. The union interprets the change as extending the upper bound of the three-man range to 60 inches. Ordinarily a dispute over the meaning of a contractual term is, if the contract contains an arbitration clause, for the arbitrator to decide. But sometimes the difference between the parties goes so deep that it is impossible to say that they ever agreed— that they even have a contract that a court or arbitrator might interpret. In the famous though enigmatic and possibly misunderstood case of Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng.Rep. 375 (Ex. 1864), the parties made a contract for the delivery of a shipment of cotton from Bombay to England on the ship Peerless. Unbeknownst to either party, there were two ships of that name sailing from Bombay on different dates. One party thought the contract referred to one of the ships, and the other to the other. The court held that there was no contract; there had been no “meeting of the minds.” See generally A.W. Brian Simpson, “Contracts for Cotton to Arrive: The Case of the Two Ships Peerless,” 11 Cardozo L.Rev. 287 (1989).

The premise — that a “meeting of the minds” is required for a binding contract— obviously is strained. 2 E. Allan Farnsworth, Contracts § 7.9, at p. 251 (1990). Most contract disputes arise because the parties did not foresee and provide for some contingency that has now materialized — so there was no meeting of minds on the matter at issue — yet such disputes are treated as disputes over contractual meaning, not as grounds for rescinding the contract and thus putting the parties back where they were before they signed it. So a literal meeting of the minds is not required for an enforceable contract, which is fortunate, since courts are not renowned as mind readers. Let us set the concept to one side, therefore, and ask how (else) to explain Raffles v. Wichelhaus and cases like it. It seems to us as it has to other courts that a contract ought to be terminable without liability and the parties thus allowed to go their own ways when there is “no sensible basis for choosing between conflicting understandings” of the contractual language, as the court said in an American Raffles like case, Oswald v. Allen, 417 F.2d 43, 45 (2d Cir.1969), quoting William F. Young, Jr., “Equivocation in the Making of Agreements,” 64 Colum.L.Rev. 619, 647 (1964). In Oswald the misunderstanding arose because the parties did not speak the same language (literally). In Balistreri v. Nevada Livestock Production Credit Association, 214 Cal.App.3d 685, 262 Cal.Rptr. 862 (1989), the parents of an aspiring farmer thought they had pledged property they owned in Sebastopol to secure a loan to their son, and indeed the lender’s cover letter described the property as “your Sebastopol residence.” But the actual deed of trust listed the parents’ home in Petaluma as the collateral. The court held that there had been no meeting of the minds.

Raffles and Oswald were cases in which neither party was blameable for the mistake; Balistreri a case in which both were equally blameable, the parents for having failed to read the deed of trust, the lender for having drafted a misleading cover letter. It is all the same. Restatement (Second) of Contracts §§ 20(l)(a), (b) (1981). If neither party can be assigned the greater blame for the misunderstanding, there is no nonarbitrary basis for deciding which party’s understanding to enforce, so the parties are allowed to abandon the contract without liability. Neel v. Lang, 236 Mass. 61, 127 N.E. 512 (1920); Konic International Corp. v. Spokane Computer Services, Inc., 109 Idaho 527, 529, 708 P.2d 932, 934 (App.1985). These are not cases in which one party’s understanding is more reasonable than the other’s. Compare Restatement, supra, § 20(2)(b). If rescission were permitted in that kind of case, the enforcement of every contract would be at the mercy of a jury, which might be persuaded that one of the parties had genuinely held an idiosyncratic idea of its meaning, so that there had been, in fact, no meeting of the minds. Cf. Young, supra, at 646. Intersubjectivity is not the test of an enforceable contract.

The clearest cases for rescission on the ground that there was “no meeting of the minds” (or, better, that there was a “latent ambiguity” in the sense that neither party knew that the contract was ambiguous) are ones in which an offer is garbled in transmission. The cases we have cited are all of that character, if “transmission” is broadly construed. Vickery v. Ritchie, 202 Mass. 247, 88 N.E. 835 (1909), provides a further illustration. A landowner and a contractor signed what they believed to be duplicate copies of a contract for the construction of a Turkish bath house. Because of a fraud by the architect for which neither the contractor nor the landowner could be blamed, the copy signed by the landowner stated the price as $23,000 and the copy signed by the contractor stated it as $34,000. Through no fault of their own, the parties had signed different contracts. Or consider Konic International Corp. v. Spokane Computer Services, Inc., supra. The seller quoted a price of “fifty-six twenty,” which the buyer thought meant $56.20. In fact the seller had meant $5,620. In both cases rescission was permitted, the first being a case in which neither party was at fault, the second one in which both were equally at fault, being careless in their utterance and interpretation, respectively, of an ambiguous oral formula.

Our case is superficially similar. The actual terms of the 1991 agreement were muddied in the summary that the union gave Colfax and that Colfax signed, making it possible that the parties had different understandings. The difference between this case and the others is that Colfax, unlike the hapless promisors in the cases we have cited, should have realized that the contract was unclear. The buyer in Konic thought — really thought — that he was being quoted a price of $56.20, and no doubt fell off his stool when he discovered that the price was a hundred times greater than he thought. But the expression “4C 60" Press” does not on its face speak to the minimum manning requirement for a 4C 78" Press. The union’s interpretation, that the.phrase merely extended the upper bound of the old range for three-man four-color presses from 50 to 60 inches, may or may not be correct. The fact that the union restated and clarified the interpretation in the corrected agreement that it sent Colfax is not decisive on the question, because it is the summary rather than the corrected full agreement that is the contract between these parties. But Colfax, if reasonable, could not have doubted from reading the summary that interpretations of the kind that the union and the district judge later placed upon it would be entirely plausible. Colfax had a right to hope that its interpretation would prevail but it had no right to accept the offer constituted by the summary on the premise that either its interpretation was correct or it could walk away from the contract. “Heads I win, tails you lose,” is not the spirit that animates the principle that latent ambiguity is a ground for rescission of a contract.

It is common for contracting parties to agree — that is, to signify agreement — to a term to which each party attaches a different meaning. It is just a gamble on a favorable interpretation by the authorized tribunal should a dispute arise. Parties often prefer to gamble in this way rather than to take the time to try to iron out all their possible disagreements, most of which may never have any consequence. Colfax gambled on persuading an arbitrator that the reference in the summary to the four-color 60-inch press, meant what Colfax believes it means. The union gambled on the arbitrator’s adopting the meaning that the union later made clear in the full agreement — but, to repeat, if there is a contract it is (the parties agree) the summary, read in light of the collective bargaining agreement that was being modified, that is the contract between these.parties.

When parties agree to a patently ambiguous term, they submit to have any dispute over it resolved by interpretation. That is what courts and arbitrators are for in contract cases — to resolve interpretive questions founded on ambiguity. It is when parties agree to terms that reasonably appear to each of them to be unequivocal but are not, cases like that of the ship Peerless where the ambiguity is buried, that the possibility of rescission on grounds of mutual misunderstanding, or, the term we prefer, latent ambiguity, arises. A reasonable person in Colfax’s position would have realized that its interpretation of the term “4C 60" Press — 3 Men” might not- coincide with that of the other party.or of the tribunal to which a dispute over the meaning of the term would be submitted. It threw the dice, and lost, .and that is the end of the case. It cannot gamble on a favorable interpretation and, if that fails, repudiate the. contract with no liability. Cf. Prudential Ins. Co. v. Miller Brewing Co., 789 F.2d 1269, 1278 (7th Cir.1986).

We would have a different case if the ambiguity were 'over whether the parties had agreed to arbitrate their disputes. The duty to arbitrate is contractual, and the interpretation of the contract that creates the duty is for the court. AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986). But courts will not allow a party to unravel a contractual arbitration clause by arguing that the clause was part of a contract that is voidable, perhaps because fraudulently induced. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 406, 87 S.Ct. 1801, 1807, 18 L.Ed.2d 1270 (1967); Matterhorn, Inc. v. NCR Corp., 763 F.2d 866 (7th Cir.1985). The party must show that the arbitration clause itself, which is to say the parties’ agreement .to arbitrate any disputes over the contract that might arise, is vitiated by fraud, or lack of consideration or assent, as in Three Valleys Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136, 1140 (9th Cir.1991); that in short the parties never agreed to arbitrate their disputes. Wheat, First Securities, Inc. v. Green, 993 F.2d 814, 818-19 (11th Cir.1993). Colfax and the union had in a long course of dealing always agreed to submit their contractual disputes to arbitration, so the only question is whether their dispute in this case was a dispute over the meaning of their contract. It was, so it had to be arbitrated, for that was the parties’ chosen method of resolving disagreements, whether or not Colfax would have signed on to the 1991 agreement had it realized what the agreement actually meant or could be interpreted to mean. Matterhorn, Inc. v. NCR Corp., supra, 763 F.2d at 873.

We go further: Even if, contrary to our earlier analysis, there was no “meeting of the minds” (in the artificial sense in which the law of contracts uses the term) on the manning requirements in the 1991 agreement, there was a meeting of the minds on the mode of arbitrating disputes between the parties arising from any collective bargaining contract (including a summary of changes in a previous contract) that Colfax signed. Under the Supreme Court’s decision in Prima Paint, a contract dispute is arbitrable even if one party argues that the contract should be rescinded because it does not express an actual agreement of the parties, for example because it was induced by fraud. All that is important is that the parties have agreed that arbitration rather than adjudication would be the mode of resolving their disputes. A different view would in many cases deprive the arbitrator of an important contract remedy — rescission. This point has implications for the scope of the arbitrator’s responsibilities, of which more presently.

We thus affirm the district judge’s decision, but point out that her conclusion that the disputed term unequivocally bears the meaning that she assigned to it (which incidentally is not identical to the union’s interpretation, for she thought it a point — 60-inch presses, period — while the union thought it a range — 60-inch presses and down) does not bind the arbitrator. His is the responsibility, subject to the excruciatingly limited right of judicial review of arbitral decisions, to interpret the agreement. It will therefore be open to Colfax to argue to the arbitrator that, under a proper interpretation' of the contract, there really was no meeting of the minds over the manning requirements and therefore that the contract should be rescinded after all. The only essential point at this stage of the litigation is that whether or not there was (as we believe, without meaning to bind the arbitrator) such a meeting of minds, there was sufficient mutual understanding to create an enforceable contract to submit the issue to arbitration.

Affirmed.