Moses H. Cone Memorial Hospital v. Mercury Constr. Corp.

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1983 U.S. Supreme Court arbitration-law case

1983 United States Supreme Court case

Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), commonly cited as Moses Cone or Cone Hospital, is a United States Supreme Court decision concerning civil procedure , specifically the abstention doctrine , as it applies to enforcing an arbitration clause in a diversity case. By a 6–3 margin, the justices resolved a complicated construction dispute by ruling that a North Carolina hospital had to arbitrate a claim against the Alabama -based company it had hired to build a new wing, even though it meant that it could not consolidate it with ongoing litigation it had brought in state court against the contractor and architect.

Justice William Brennan wrote for the majority that a district court's stay of the contractor's petition to compel arbitration was an "abuse of discretion". It had not properly applied the Court's prior ruling in _Colorado River Water Conservation District v. United States _. Since the net effect of the stay was to force the contractor to litigate in state court, Mercury's appeal to the Fourth Circuit was proper, and the appeals court properly reversed the stay. Since the contract was covered by the Federal Arbitration Act (FAA), the hospital had no way to avoid arbitration, which the contractor could not be assured of getting under existing state law.

William Rehnquist 's dissent, joined by Chief Justice Warren E. Burger and Sandra Day O'Connor , accused the majority of misreading the case in order to get the contractor into arbitration. He argued that another case, _Will v. Calvert Fire Insurance Co. _, permitted the district court's action, which in any case was routine docket management practiced by many district judges.

While arbitration was not the main issue in the case, it had a profound effect on future cases concerning the FAA. Two of Brennan's passing _dicta _, that the FAA applied to actions in state court and that it enacted a national policy in favor of arbitration, became the central holdings of _Southland Corp. v. Keating _ the following year, a case from which O'Connor and Rehnquist dissented. Those holdings have been challenged, even by some other justices, as fundamentally at odds with the language and legislative history of the FAA, even as the Court has continued to expand its scope since then.

Source of the dispute

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In 1975 Moses H. Cone Memorial Hospital in Greensboro, North Carolina , contracted with Mercury to build a new wing. The contract, drafted by the hospital's attorneys, vested most dispute resolution authority, relating to aesthetic matters, in the project's architect, J.N. Pease Associates of Charlotte , with the opportunity to go to arbitration if the architect did not rule on the dispute within ten days of the evidence being presented, or if they disagreed with its decision.

The project was scheduled to completed by October 1977, but due to change orders and some other problems the hospital and Mercury agreed on a two-year extension, provided Mercury withhold its claim for delay and impact costs until after the work was done. By February 1979 the wing was substantially complete, except for some punch list items.

In January 1980, Mercury submitted its claim for up to $2 million in additional costs to the architect. Over the next several months, Mercury and the architect went over the claim, apparently with the goal of reducing it. The hospital contended later it was unaware of these negotiations until April of that year, and that the architect exceeded its contractual powers by delaying and allowing the claims to be presented after completion. By the time it was aware, the claim had been reduced to $600,000–1.2 million.

When it was presented with the claim, the hospital asked for time to have its own expert review it. Mercury, the hospital and the architect met in August in Birmingham, Alabama . Mercury offered the hospital access to its files. The hospital asked that the copies be mailed to its expert, who was unable to attend the meeting due to a scheduling conflict. The parties agreed to meet again in October.

Litigation

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A week before that meeting, Mercury's lawyer called the hospital's lawyer to confirm the meeting date. The hospital's lawyer said he would be able to do so the next day. Instead, when he called, it was to inform Mercury's lawyer that the hospital did not intend to pay as its expert found that none of the delays were its fault and was filing for a declaratory judgment in North Carolina state court to the effect that it did not have to arbitrate and owed Mercury nothing (and that even if it did, the architect would owe the hospital the judgment).

The hospital filed the next morning in Guilford County Superior Court, naming Mercury and the architect as defendants, charging negligence and breach of contract , but not alleging a conspiracy between the two. It said that Mercury had, through its delays, forfeited any right to arbitration. Mercury filed a demand for arbitration the following day. A week later, the hospital filed _ex parte _ in state court for an injunction , which it received, barring Mercury from proceeding with arbitration. Mercury objected and two weeks later the injunction was lifted.

In the interim it had initiated an action in the Middle District of North Carolina federal court to compel the hospital to arbitrate under the Federal Arbitration Act and asking that the state court action be removed to federal court. The hospital responded by asking for the case to be removed back to state court, and that the federal case be stayed pending resolution of the state court action. The district court agreed, finding that there was not diversity and that the state court action was similar enough to the action before it.

Appeal

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Mercury filed for an interlocutory appeal with the Fourth Circuit . Citing the circuit rule that such appeals are permitted when the practical effect of the district court's ruling is to put an end to the action, it decided to hear the case. An _en banc _ panel of nine judges heard arguments in June 1981 and ruled in Mercury's favor two months later.

Judge Donald S. Russell wrote for a majority of seven that Mercury was entitled to its arbitration order based on a variety of precedents . The action did not meet the FAA's requirement that arbitration can be avoided only through standard defenses to contract formation , nor had previous appeals courts allowed pending state-court action to prevail. Federal law was controlling , overriding North Carolina law that held contracts such as the one between Mercury and the hospital not to be in interstate commerce and thus under the domain of state law, which in this case would have allowed the hospital to avoid arbitration. He called the hospital's contention that its designation of the architect, also based in Nor

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