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 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 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 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.In Re Mercury Construction Corporation v. Moses H. Cone Memorial Hospital, 656 F. 2nd 933 (1981).
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 North Carolina, as the dispute-resolution authority and the latter's status as a defendant in its lawsuit "a novel theory for avoiding arbitration".
He distinguished the case from Will v. Calvert Fire Ins. Co., in which the Supreme Court had sustained a federal court's abstention in favor of a state court, by saying there were no exceptional circumstances. In that case, the state action had long preceded the federal action, and unlike Colorado River the parties were few and located near each other. He dismissed the hospital's claim that Mercury's petition for an arbitration order was a delaying tactic, calling the hospital's behavior more clearly contrived.
Nor was he moved by the hospital's desire to avoid piecemeal litigation, part of the justification for Colorado River. "Even assuming there is some controversy between the Hospital and the Architect, to which Mercury is not a party," Russell wrote, "why should Mercury be delayed in its right to a prompt resolution by arbitration, without the expense of long and protracted litigation, as the parties had solemnly agreed, because of some controversy between the Hospital and its Architect? Such a maneuver plainly prejudiced Mercury in its right to arbitration under the Federal Act." He also doubted the hospital's claim that Mercury faced no greater burden pursuing arbitration in state court, since while North Carolina's arbitration law was similar to the federal statute, it had rarely been interpreted by that state's courts. "Until a statute has been given an authoritative judicial construction by the enacting state's own courts, its application and reach are uncertain."
The two dissenting judges were H. Emory Widener Jr. and Kenneth Keller Hall. They pointed out that existing case law in other circuits had required that state courts rule on the arbitrability of issues under dispute. "The action of the district court is nothing more nor less than the exercising of control of its own docket, in which matter it should be allowed rather wide latitude instead of being strictly circumscribed as the majority would have it", Widener wrote. He defended the North Carolina courts, quoting the Supreme Court in Sumner v. Mata to the effect that state judges were also required to swear to uphold the Constitution and should be presumed capable of doing so despite differences of interpretation.
He concluded by casting doubt on the majority's imputation that the hospital had been manipulating the system to avoid arbitration. It seemed a more reasonable conclusion to Widener that the hospital, distrusting both its architect and contractor, had decided it was better to have all the parties in one forum. Accusing the majority of "bootstrap logic", he said "The treacherous motives attributed to these acts is more likely a conjecture stemming from the majority's hindsight than the reasoned product of the Hospital's foresight."
Before the Court The Court granted certiorari to hear the case due to the procedural issues involved. Its decision to hear the case allowed the consideration of a third issue: was the district court's stay properly appealable? After the 1981 term had intervened, it heard oral arguments on the abstention, appealability and arbitrability questions in November 1982.
Jack Floyd, arguing for the hospital, called Mercury's petition for an arbitration order "curious". He reiterated that the contract stipulated that North Carolina law applied to it, and that other circuits faced with similar questions had ruled state arbitration law governed in that situation. There were always exceptions, he added. "To say 'I agree to arbitrate' does not mean that I agree to arbitrate every conceivable dispute." Mercury had brought its claim beyond the original time frame of five years from the execution of the contract, so the hospital was not bound to arbitrate that.
Confronted with the issue of whether there would be a different outcome in federal court, since the federal court would have to follow North Carolina law as well, he maintained that "Mercury has no right to select its court". The stay should not have been appealed, he said, since Mercury could have gone back to district court at any time if it felt the state court proceeding was not fair and asked that the stay be lifted. As to abstention, he argued that "the circumstances compelled stay more clearly" than they had in Colorado River or Will.
"Generally," A.H. Gaede said for Mercury, "the federal courts are far more familiar with the interpretation and enforcement of the Federal Arbitration Act." He reiterated the facts of the case — his client had been asked to withhold its claims until after completion of the project, and the architect had concluded they were entitled to at least some of them. Only after the hospital had told them of its intention to sue did they have standing to request an arbitration order.