Colfax Envelope Corp. v. Local No. 458-3M
20 F.3d 750 (1994)
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Rule of Law:
When parties agree to a contract term that is patently (obviously) ambiguous, they have formed a valid contract, and any dispute over that term's meaning is a matter of interpretation for an arbitrator or court. A party cannot accept a patently ambiguous term, hope for a favorable interpretation, and then seek to rescind the contract by claiming a lack of "meeting of the minds" when that interpretation fails.
Facts:
- Colfax Corporation, a manufacturer, historically adopted collective bargaining agreements (CBAs) negotiated between its employees' union and a larger industry association.
- The prior CBA required a four-man crew for Colfax's two 78-inch printing presses when operating in four colors.
- In 1991, the union sent Colfax a summary of changes to the CBA, which included a new manning requirement stated as "4C 60" Press — 3 Men."
- Colfax's president, Charles Patten, believed this new term reduced the manning requirement on his company's 78-inch presses to three men.
- Based on this understanding, Patten signed a letter formally accepting the terms outlined in the summary.
- The union, however, intended the change to apply only to presses up to 60 inches wide, meaning the requirement for Colfax's larger presses remained unchanged.
- Upon receiving the full, corrected agreement that reflected the union's interpretation, Patten refused to sign it, contending no actual agreement had been reached on this essential term.
Procedural Posture:
- Colfax Corporation filed a suit in U.S. District Court seeking a declaration that it had no collective bargaining contract with the union.
- The union filed a counterclaim seeking an order to compel arbitration.
- The district court granted summary judgment for the union, concluding the contract was unambiguous and ordered the parties to arbitrate.
- Colfax Corporation, as appellant, appealed the district court's decision to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a party's acceptance of a patently ambiguous contract term, without seeking clarification, form an enforceable contract subject to interpretation by an arbitrator, rather than allowing for rescission on the grounds that there was no "meeting of the minds"?
Opinions:
Majority - Posner, Chief Judge
Yes, an enforceable contract was formed. The court distinguishes between latent ambiguity, where neither party is aware of the misunderstanding (like in Raffles v. Wichelhaus), and patent ambiguity, which is obvious on its face. Here, the term '4C 60" Press' does not facially apply to a 78-inch press, making the ambiguity patent. A reasonable party in Colfax's position would have recognized the potential for different interpretations and had a duty to seek clarification. By signing anyway, Colfax gambled on a favorable interpretation and cannot now rescind the contract when the gamble fails. Thus, a contract was formed, and the interpretive dispute over the term's meaning falls within the scope of the agreement's arbitration clause.
Concurring - Cudahy, Circuit Judge
Yes, an enforceable contract was formed. The summary document was unambiguous on its face; it specified changes for particular press sizes and made no mention of the 4-color 78-inch press, meaning its manning requirements were unchanged. Colfax's attempt to frame this as an issue of contract formation is an effort to escape the arbitration clause. The court's only role is to determine if a contract to arbitrate exists, which it clearly does. The interpretation of its terms is for the arbitrator.
Concurring - McDade, District Judge
Yes, an enforceable contract was formed. The majority's approach is correct in finding that the parties had a 'meeting of the minds' to execute a contract containing a patently ambiguous term, and Colfax accepted the risk of an unfavorable interpretation. However, the majority is incorrect to suggest the arbitrator can now find there was 'no meeting of the minds' and rescind the contract. The court's function is to determine contract formation; having found a contract exists, the arbitrator is bound by that finding and may only interpret the contract's terms, not decide on its existence.
Analysis:
This decision refines the 'meeting of the minds' doctrine by creating a critical distinction between latent and patent ambiguities. It establishes that when an ambiguity is obvious, a party has a duty to clarify or will be deemed to have accepted the risk of an unfavorable interpretation. This prevents parties from strategically using ambiguity as an escape hatch to void a contract if a dispute arises. The ruling reinforces the strong federal policy favoring arbitration by defining such disputes as matters of interpretation for the arbitrator, rather than matters of formation for the court.
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