Moses Cone Memorial Hospital v. Mercury Construction Corporation, No. 81-1203

• Court: United States Supreme Court
• Writing for the Court: BRENNAN
• Citation: 460 U.S. 1,103 S.Ct. 927,74 L.Ed.2d 765
• Parties: MOSES H. CONE MEMORIAL HOSPITAL, Petitioner v. MERCURY CONSTRUCTION CORPORATION
• Docket Number: No. 81-1203
• Decision Date: 23 February 1983

460 U.S. 1 103 S.Ct. 927 74 L.Ed.2d 765 MOSES H. CONE MEMORIAL HOSPITAL, Petitioner

v.

MERCURY CONSTRUCTION CORPORATION.

No. 81-1203. Argued Nov. 2, 1982. Decided Feb. 23, 1983. Syllabus

Petitioner, a hospital located in North Carolina, entered into a contract with respondent contractor, an Alabama corporation, for construction of additions to the hospital building. Contract disputes were to be initially referred to the architect who was hired to design and oversee the construction project. Disputes decided by the architect or not decided within a specified time could be submitted to binding arbitration under an arbitration clause in the contract. Subsequently, during construction, respondent submitted claims to the architect for extended overhead or increase in construction costs due to petitioner's delay or inaction. But the claims were not resolved, and petitioner refused to pay them. Petitioner then filed an action in a North Carolina state court against respondent and the architect, seeking a declaratory judgment that there was no right to arbitration, that petitioner was not liable to respondent, and that if it was liable it would be entitled to indemnity from the architect. A few days later petitioner obtained an ex parte injunction from the state court forbidding respondent to take any steps toward arbitration, but when respondent objected the stay was dissolved. Respondent then filed a diversity-of-citizenship action in Federal District Court, seeking an order compelling arbitration under § 4 of the United States Arbitration Act. The District Court stayed the action pending resolution of the state-court suit because the two suits involved the identical issue of the arbitrability of respondent's claims. The Court of Appeals, holding that it had jurisdiction under 28 U.S.C. § 1291, reversed the

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District Court's stay order and remanded the case with instructions to enter an order to arbitrate.

Held:

1. The District Court's stay order was appealable as a "final decision" to the Court of Appeals under 28 U.S.C. § 1291. Since the order was based on the conclusion that the federal and state actions involved the identical issue of arbitrability, and this issue was the only substantive issue present in the federal action, a stay of the federal action pending resolution of the state action meant that there would be no further litigation in the federal court. Thus, respondent was "effectively out of court" so that the stay order amounted to a dismissal of the federal action. Moreover, even if the stay order was not final for appealability purposes, it was nevertheless appealable within the finality rule exception that applies where an order conclusively determines the disputed question, resolves an important issue completely separate from the merits, and is effectively unreviewable on appeal from a final judgment. Cohen v. Beneficial Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528. Pp. 8-13.

2. The District Court abused its discretion in granting the stay. Pp. 13-28.

(a) A federal district court may decline to exercise its jurisdiction because of parallel state-court litigation only in exceptional circumstances; only the clearest of justifications will warrant dismissal. Colorado River Water Conservation District v. United States, 424 U.S. 800, 818-819, 96 S.Ct. 1236, 1246-47, 47 L.Ed.2d 483. The decision whether to stay or dismiss a federal action on grounds of wise judicial administration does not rest on a mechanical checklist, but on a careful balancing of the important factors (which court first assumed jurisdiction over property involved in the litigation, inconvenience of the federal forum, avoidance of piecemeal litigation, and the order in which the concurrent forums obtained jurisdiction) relevant to the decision as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction. Ibid. Pp. 13-16.

(b) The exceptional-circumstances test set forth in Colorado River, supra, was not undermined by Will v. Calvert Fire Insurance Co., 437 U.S. 655, 98 S.Ct. 2552, 57 L.Ed.2d 504. Pp. 16-19.

(c) There was no showing of the requisite exceptional circumstances to justify the District Court's stay order. Concededly, there was no assumption by either court of jurisdiction over any res or property or any contention that the federal court was any less convenient to the parties than the state court. The other factors—avoidance of piecemeal litigation and the order in which the current forums obtained jurisdiction rather than supporting the stay, counsel against it. The fact that if respondent obtains an arbitration order, petitioner will be forced to resolve

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the dispute with respondent and the related dispute with the architect in different forums is not the result of any choice between federal and state courts but occurs because the relevant federal law, the Arbitration Act, requires piecemeal resolution when necessary to give effect to an arbitration agreement. Hence, the decision to allow the issue of arbitrability to be decided in the state rather than in the federal court does not cause piecemeal resolution of the parties' underlying disputes. And the fact that the state-court suit was filed before the federal suit is not sufficient reason to justify the stay order, where because petitioner's refusal to arbitrate did not occur until less than a day before it filed its state suit, respondent had no reasonable opportunity to file its federal suit first. Moreover, priority should not be measured exclusively by which complaint was filed first, but rather in terms of how much progress has been made in the two actions. Here, no substantial proceedings had taken place in the state suit at the time of the District Court's stay order, whereas in the federal suit the parties had taken most of the steps necessary to a resolution of the arbitrability issue. The stay order thus frustrated the Arbitration Act's policy of rapid and unobstructed enforcement of arbitration agreements. Pp. 19-23.

(d) The fact that federal law in the terms of the Arbitration Act governs the issue of the arbitrability of the dispute between petitioner and respondent in either the state or the federal court is another factor militating against the District Court's stay order. See Calvert, supra. Pp. 23-26.

(e) Finally, an important reason against allowing a stay is the probable inadequacy of the state suit to protect respondent's rights, since it is doubtful that respondent could obtain from the state court an order compelling petitioner to arbitrate. Pp. 26-27.

(f) The fact that the District Court stayed the federal action rather than dismissing it outright does not render the Colorado River exceptional-circumstances test inapplicable. Pp.27-28

3. The Court of Appeals acted within its authority in deciding that the contractual dispute was arbitrable under the Arbitration Act and the contract, where the court had briefs and evidentiary submissions from both parties on the merits of arbitrability. P.29

656 F.2d 933 (CA4 1981), affirmed.

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Jack W. Floyd, Greensboro, N.C., for petitioner.

A.H. Gaede, Jr., Birmingham, Ala., for respondent.

Justice BRENNAN delivered the opinion of the Court.

This case, commenced as a petition for an order to compel arbitration under § 4 of the United States Arbitration Act of 1925 (Arbitration Act or Act), 9 U.S.C. § 4, presents the question whether, in light of the policies of the Act and of our decisions in Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), and Will v. Calvert Fire Insurance Co., 437 U.S. 655, 98 S.Ct. 2552, 57 L.Ed.2d 504 (1978), the District Court for the Middle District of North Carolina properly stayed this diversity action pending resolution of a concurrent state-court suit. The Court of Appeals for the Fourth Circuit reversed the stay. 656 F.2d 933, rehearing denied, 664 F.2d 936 (CA4 1981). We granted certiorari. 455 U.S. 937, 102 S.Ct. 1426, 71 L.Ed.2d 647 (1982). We affirm.

I

Petitioner Moses H. Cone Memorial Hospital ("Hospital") is located in Greensboro, North Carolina. Respondent Mercury Construction Corp. ("Mercury"), a construction contractor, has its principal place of business in Alabama. In July 1975, Mercury and the Hospital entered into a contract for the construction of additions to the Hospital building. The contract, drafted by representatives of the Hospital, included provisions for resolving disputes arising out of the contract or its breach. All disputes involving interpretation of the contract or performance of the construction work were to be referred in the first instance to J.N. Pease Associates ("Architect"), an independent architectural firm hired by the Hospital to design and oversee the construction project. With certain

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stated exceptions,¹ any dispute decided by the Architect (or not decided by it within a stated time) could be submitted by either party to binding arbitration under a broad arbitration clause in the contract:

"All claims, disputes and other matters in question arising out of, or relating to, this Contract or the breach thereof, . . . shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then obtaining unless the parties mutually agree otherwise. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. The award rendered by the arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof." App. 29-30.

The contract also specified the time limits for arbitration demands.²

Construction on the project began in July 1975. Performance was to be completed by October 1979.³ In fact, construction was substantially completed in February 1979, and final inspections were made...