In rе MERCURY CONSTRUCTION CORPORATION, Petitioner. MERCURY CONSTRUCTION CORPORATION, Appellant, v. The MOSES H. CONE MEMORIAL HOSPITAL, Appellee.
Nos. 81-1009, 81-1042
United States Court of Appeals, Fourth Circuit
Decided Aug. 12, 1981.
664 F.2d 933
Heard En Banc June 1, 1981.
Jack W. Floyd, Greensboro, N.C. (Stephen P. Millikin, Douglas W. Ey, Jr., Smith, Moore, Smith, Schell & Hunter, Greensboro, N.C., on brief), for The Moses H. Cone Memorial Hospital.
Before WINTER, Chief Judge, and BUTZNER, RUSSELL, WIDENER, HALL, PHILLIPS, MURNAGHAN, SPROUSE and ERVIN, Circuit Judges, sitting en banc.
DONALD RUSSELL, Circuit Judge:
The appellant Mercury Construction Company (hereafter Mercury)1 sought in this action arbitration under the Federal Arbitration Act2 of certain disputes between it and the Moses H. Cone Memorial Hospital (hereafter Hospital),3 under a construction contract between Mercury and the Hospital. Federal jurisdiction was properly premised on diversity. The district court denied arbitration, pending disposition of a state action by the Hospital against Mercury and J.N. Pease Associates, (hereafter Architect),4 for declaratory judgment denying arbitration. Mercury seeks relief both by way of a petition for mandamus and by appeal. We reverse.
A summary of the facts leading up to the two actions is necessary to an understanding of the issues. In stating these facts, we have followed the allegations of the parties in their respective pleadings or presentations to the Court. On July 15, 1975, Mercury and the Hospital entered into a construction contract for Hospital additions. The agreed contract price was several million dollars. The contract, concededly drafted by the attorneys, or agents for the Hospital, includes a very broad arbitration clause covering “[a]ll claims, disputes and other matters in question arising out of, or relating to, this Contract or the breach thereof,” subject to the requirement that any such claim shall first be submitted to the “Architect,” as defined in the contract, and that no demand for arbitration shall be made “until the earlier” of the Architect‘s written decision on the claim or “the tenth day after the parties have presented their evidence to the Architect or have been given a reasonable opportunity to do so, if the Architect has not rendered his written decision by that date.” The time for filing any claim is declared to be “within a reasonable time after the claim, dispute or other matter in question has arisen, and in no event shall be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations.”
The Architect for the project is designated and identified in the contract. He was selected by the Hospital and was declared in the contract to be “the Owner‘s representative during construction and until final payment,” to whom, as the “interpreter of the contract” “[a]ll papers required to be delivered to the Owner” should be delivered, to whom “[a]ny notice to or demand upon the Owner [should] be given,” and to whom any “[c]laims, disputes and other matters in question [should] be referred initially ... for decision.”
Construction under the contract began in July, 1975 and was to be completed within 1200 consecutive calendar days (or approximately 40 months). Because of change orders and other problems work time extension of 334 days was agreed upon. This meant that the contract time for completion was fixed at October 14, 1979. In October, 1977, as work under the contract was pro
At any rate, in January, 1980, Mercury submitted to the Architect its claim for additional payment on account of “delays and impact inefficiencies,” etc., which Mercury contends under the agreement of October, 1977 with the Architect, was to be submitted only after the work had been completed. According to the Hospital‘s claims, the Architect reviewed this claim with Mercury over a period of several months and apparently succeeded in inducing Mercury to reduce its claim substantially. The Hospital claims it was completely ignorant of all this, however, until April 17, 1980, at which time, according to its allegations, its Architect “furnished to Cone Hospital various written materials by way of information, including a copy of a narrative statement of the Mercury claims.”5 However, the Hospital avers that its counsel tоok over the discussions of the claims with Mercury in May, 1980. Hospital‘s counsel stated to Mercury‘s representative, according to Mercury‘s affidavits, that the businessmen who ran the Hospital “would need additional information regarding the claim before undertaking negotiations in earnest.” In order to provide this information, a meeting was held in Birmingham, Alabama, on August 12, 1980. Present were counsel for the Hospital, one of its trustees, representatives of the Architect, and representatives of Mercury, including its counsel. At that conference, Mercury went over its claim in detail with the parties and offered the Hospital access to its files. The Hospital asked that copies of the files be mailed to its expert who had been employed to assist it in assessing the claim but who was unable to attend that meeting because of a schedule conflict. It was further agreed at this meeting that, provided the Hospital‘s expert had completed his review of the claims, another meeting on the claim would be held on October 13.
On October 6, Mercury‘s counsel telephoned the Hospital‘s counsel to inquire whether the Hospital‘s expert had completed his review of the claims and thus would be prepared to meet as tentatively agreed on October 13. The Hospital‘s counsel advised Mercury‘s counsel that he would advise Mercury‘s counsel on October 7 if the meeting date would be satisfactory. On the afternoon of October 7, Hospital counsel advised Mercury‘s counsel by telephone that the Hospital intended to offer no money to settle Mercury‘s claim and was filing immediately in state court a complaint for a declaratory judgment “that it did not have to arbitrate and that it owed Mercury nothing (but that if it did owe Mercury money, the Architect in turn owed that money to the Hospital).” Mercury‘s counsel advised Mercury of this conversation and Mercury instructed its counsel to file an arbitration demand. Counsel mailed such demand on the morning of October 9, 1980.
The Hospital did file its action in the state court on the morning of October 8, 1980, naming as defendants Mercury and the Hospital‘s Architect. Service of the action was made on Mercury on October 9, 1980. In its complaint, the Hospital alleges essentially, so far as Mercury is concerned, that there is no “factual or legal basis” for Mercury‘s claim and that such claim is barred “by the applicable statute of limitations.” It also alleges that “Mercury hаs not demanded arbitration and has no right under the contract to have these claims or disputes submitted to arbitration,” adding that Mercury has lost its right to arbitra
In its charges against the Architect as defendant in its state court action, the Hospital asserted various delinquencies in the performance of its duties, including premature acceptance of parts of the structure before such parts were properly usable and delays in making decisions and in “preparing and forwarding requests for proposals, revised drawings, instructions and other information to the contractor.” With particular reference to the claim of Mercury, the Hospital charged in its complaint that the Architect had been negligent in connection therewith in not “requiring disposition of claims and disputes during the course of the work as required by the contract provisions,” by procrastinating and failing “to rule on matters in dispute during the course of the work; by failing adequately to represent the interests of Cone Hosрital; by not advising Cone Hospital promptly of the claims being asserted by Mercury; by breaching the fiduciary duty which Pease [the Architect] owed to Cone Hospital; and by other ways not specifically set forth hereinabove.” Significantly, there is no charge of any conspiracy, or illegal combination on the part of Mercury and the Architect. By way of relief it sought judgment “that there is no right to arbitration, and that arbitration be stayed; ... that there is no liability on the part of Cone Hospital to Mercury ...;” and “that should it be determined that any amount [if there is any] as owed by Cone Hospital to Mercury, that it be determined and declared that Cone Hospital is entitled to be fully indemnified and reimbursed....” It demanded a jury trial on all issues.
After filing its complaint, the Hospital secured on October 15, 1980, ex parte, without any notice to Mercury, an injunction from the state court barring Mercury “from taking any action or actions directed toward arbitration of disputes between The Moses H. Cone Memorial Hospital and Mercury Construction Corporation until the trial provided for by N.C.G.S. § 1-567.3(b) has occurred, and until the Superior Court has issued its Order as contemplated by this statute; ....” Mercury objected to this stay and, by order dated October 27, 1980, the stаy was dissolved. In the meantime Mercury had filed this action, alleging diversity between the plaintiff and the defendant, and seeking relief by way of an order of arbitration and stay of judicial proceedings pending such arbitration pursuant to the terms of the United States Arbitration Act. Mercury, also, petitioned for the removal of the state action filed by the Hospital to the federal court. Following removal of that state action, the Hospital moved for the remand of its action to the state court and for a stay of the federal action begun by Mercury pending resolution of the state court action. The district court granted remand, finding that the action between Mercury and the Hospital “was not separate and independent from the claim or cause of action against Pease [the Architect],” and that there was accordingly not diversity between the parties. It, also, stayed the action before it “pending resolution of Moses H. Cone Memorial Hospital v. Mercury Construction Corp. and J. N. Pease Associates, 80 CvS. 6787, in the North Carolina General Court of Justice, Superior Court Division (Greensboro).” In reaching this decision, it said that the state action “involve[d] the identical issue of arbitrаbility of the claims of Mercury Construction Corp. against the Moses H. Cone Memorial Hospital which is involved in this action.” In finding a stay appropriate in such a situation, the district court cited and relied on E. C. Ernst, Inc. v. Potlatch Corp., 462 F.Supp. 694, 699-701 (S.D.N.Y.1978).
Mercury has sought review of that decision of the district court to stay the federal action by both mandamus and by direct appeal under
The real issue in this case, determinative of this appeal, is the right of the plaintiff to an order of arbitration by the district court of its dispute with the Hospital pursuant to the Federal Arbitration Act, and whether that right, if it exists, may be frustrated by the “reactive” filing of a state declaratory action by the Hospital asserting the non-arbitrability of the dispute before Mercury had any real opportunity to seek arbitration. The resolution of this issue involves primarily the construction and application of the Federal Act.
By its express language the Federal Act applies where there is “[a] written provision in ... a contract evidencing a transaction involving cоmmerce to settle by arbitration a controversy thereafter arising out of such contract ....”
In determining these principles of “substantive federal law,” which govern the application of the Federal Act, the courts have begun by looking first at the purposes of the Act itself. As declared in Prima, 388 U.S. at 403-04, the
Section 4 of the Act, after establishing the specific issue to be resolved in an action under the Act, directs the court to order arbitration once it is “satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue,” and Section 3 requires a stay of all proceedings “until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.”8
It is obvious from these statutes that in a case such as this, there are but two facts which a plaintiff seeking arbitration must establish: (1) The making of the agreement and (2) the breach of the agreement to arbitrate. This was recognized by the district court which decided this case. In C. P. Robinson Const. Co. v. National Corp. for Hous. Part., 375 F.Supp. 446, 451 (M.D.N.C. 1974), the Court said:
“The district court [in an actiоn under the Arbitration Act] must hear the parties and on being satisfied that (1) the making of the agreement for arbitration is not in issue and (2) the failure to comply with the agreement is not in issue, the court must order the parties to proceed to arbitration in accordance with the terms of the agreement.”9
Section 3, it is true, would deny the right to a stay of proceedings in favor of arbitration if it can be said that the applicant for the stay is “in default in proceeding with such arbitration.” It is often likened to waiver or laches or estoppel, but these terms are used not in their traditional sense but are to be given a definition and application in line with the statutory purposes and preferences reflected in the Act. But “default” in this sense is not to be lightly inferred in view of the statutory favor for arbitration.10 Thus, mere “delay in making an arbitration demand is not a default within the meaning of Section 3.” Halcon International, Inc. v. Monsanto Australia, Ltd., 446 F.2d 156, 161 (7th Cir. 1971);11 it is only when this delay results in actual prejudice that it may amount to “default” within the Act. Batson Y. & F.M. Gr., Inc. v. Saurer-Allma, etc., 311 F.Supp. 68, 72 (D.S.C. 1970). These are two situations and only two situations in which such prejudice, under the federal decisions, may rise to the level of “default” under the Act and these situations are generally described under the general classification of “waiver.” These two typеs of “waiver” are correctly identified in N&D Fashions, Inc. v. DHJ Industries, Inc., 548 F.2d 722, 728 (8th Cir. 1976).
The first type of waiver identified in N&D Fashions and qualifying as a “default” occurs “when a party ‘actively participates in a lawsuit or takes other action inconsistent with’ the right to arbitration.” Id. at 728. In Chatham Shipping Co. v. Fertex Steamship Corp., 352 F.2d 291, 293
The second type of “default” or “waiver” identified in N&D Fashions, supra, “applies to bar arbitration when the process would be inequitable to one party because relevant evidence has been lost due to the delay of the other.”12 This type of “waiver” which may bar arbitration was earlier described in Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568, 571 (2d Cir. 1968) thus:
“The purpose of laches is simply to relieve a decision-making body of the duty to resolve, and to prevent one party from having to prove, issues as to which the relevant evidence has been lost due to the delay of the other party. The only issues which the court is authorized to consider on a motion to compel arbitration are ones which pertain to ‘the making of the arbitration agreement or the failure, neglect, or refusal to perform the same,’
9 U.S.C. § 4 ; Prima Paint Corp. v. Flood & Conklin, supra, 388 U.S. at 403-404. If one of these issues is disputed before the court, and if one party claims that its ability to present proof in relation thereto has been prejudiced through the delay of the other, the court may consider whether it is fair to permit the dilatory party even to invoke its processes under the Act.”13
But “waiver” or “estoppel” in this sense as constituting “default” under the Act presents a question to be resolved by the arbitrator and not by the court. Halcon International, Inc. v. Monsanto Australia, Ltd., supra, 446 F.2d at 160-163 (“... laches is to be determined by the arbitrators“); N&D Fashions, supra, 548 F.2d at 728; Janmort Leas., Inc. v. Econo-Car Intern., supra, 475 F.Supp. at 1290. As the Court in Trafalgar stated (401 F.2d at 572):
“laches is not a technical legal issue which only a judge is competent to decide. Rather in the often esoteric field of commercial dealings, and in admiralty, it would seem that the severity of prejudice suffered through delay, and the reasonableness of excuses offered by the dilatory party, the elements of laches, might be resolved better where resort is had to the expertise of the arbitrators.”
Apart from “laches,” there are two other grounds which are occasionally asserted as barring arbitration but which the federal courts have consistently ruled, as a matter of “federal law,” are not valid bars to arbitration. One of these grounds concerns the situation where a non-arbitrable claim is joined in the action with an arbitrable claim. The courts have uniformly held that the arbitrability of the arbitrable claim is not to be defeated or delayed because it is joined in the litigation with other issues not subject to arbitration. This principle is illustrated in Janmort Leas., supra, 475 F.Supp. at 1290, where the Court said:
“That a controversy involves some claims which are not subject to arbitration will not preclude a court from directing arbitration of those claims which are.”
Perhaps more analogous to the case under review here is Acevedo Maldonado v. PPG Industries, Inc., 514 F.2d 614, 616-17 (1st Cir. 1975). In this case the plaintiff sued the operator of a chlorine plant in negligence for injuries suffered from gas escaping from the chlorine plant. The operator of the plant filed a third-party complaint against the designer of and contractor constructing the plant seeking “the right of contribution from a joint tortfeasor, proportionate to its negligence in designing and building the plant, for damages thаt might be awarded against third-party plaintiffs.” The third-party defendants (i. e., the designer and builder) “moved for a stay ... pending arbitration.” The district court denied the motion and the third-party defendants appealed. The Court of Appeals reversed, ordering arbitration of the arbitrable issue. See also to the same effect, Sam Reisfeld & Son Import Co. v. S. A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976); Buffler v. Electronic Computer Programming Inst., Inc., supra, 466 F.2d at 700; Episcopal Housing Corp. v. Federal Ins. Co., supra, 269 S.C. at 641, 239 S.E.2d at 652.14
In other instances, the party objecting to arbitration has asserted that arbitration in federal court should be denied because of the pendency of a similar action in state court. These efforts, too, have been nullified by the courts. Federal courts will not “permit a party to a contract to circumvent an arbitration clause by commencing litigation in a state court.” Sumitomo Corp. v. Parakopi Compania Maritima, 477 F.Supp. 737, 742 (S.D.N.Y. 1979); Commonwealth Edison Co. v. Gulf Oil Corp., 400 F.Supp. 888, 890 (N.D.Ill.1975), aff‘d., 541 F.2d 1263; Burger Chef Systems, Inc. v. Baldwin, Incorporated, 365 F.Supp. 1229, 1233-34 (S.D.N.Y. 1973); Network Cinema Corporation v. Glassburn, 357 F.Supp. 169, 172 (S.D.N.Y. 1973); contra, E. C. Ernst, Inc. v. Potlatch Corp., 462 F.Supp. 694, 699-701 (S.D.N.Y. 1978). In commenting on the cases from the Southern District of New York on this point, the Court in Commonwealth Edison said (400 F.Supp. at 890):
“Those courts would not allow one party to circumvent an arbitration clause through the utilization of state court litigation and neither will I; to do so defeats the basic purposes of arbitration itself.”15
Particularly may not the parties burden the arbitration process under the Federal Act “by adopting state law which shifts the determination of disputes from arbitrators to courts. To allow [that] would undermine the provisions оf the Federal Act.”16
Measured by the above settled canons for the application of the Federal Arbitration Act, this case plainly qualified for relief under Section 4. Concededly, there was an independent basis for federal jurisdiction (i. e., diversity). Under standards
Actually as we understand its position, the Hospital does not contest the right normally of Mercury to an order to proceed with arbitration “in accordance with” the principle stated in C. P. Robinson Construction. Its basic contention is simply that because it has filed a state action for declaratory judgment that Mercury is not entitled to arbitration under the Federal Arbitration Act, the federal court is obligated to stand aside in favor of the state action. This position was adopted by the district court as the basis for its decision. Before reaching the propriety of that ruling, it is important to note the theories on which the Hospital predicates its state claim of non-arbitrability as set forth in its state complaint.
First, the Hospital asserts that the contract in this case does not involve interstate commerce and is thus not within the coverage of the Federal Arbitration Act. It has admittedly North Carolina authority to support this view. Burke Cty. Pub. Sch. Bd. of Ed. v. Shaver Partner., 265 S.E.2d 481, 483 (N.C.App. 1980); Bryant-Durham Elec. v. Durham County Hospital, 256 S.E.2d 529, 532, 42 N.C.App. 351 (1979). However, the district courts of North Carolina, as well as other courts, are to the contrary, and federal rules are controlling. C. P. Robinson Const. Co. v. National Corp. for Hous. Part., supra, 375 F.Supp. 446; Warren Bros. Co. v. Community Building, supra, 386 F.Supp. 656; E. C. Ernst, Inc. v. Manhattan Const. Co., supra, 551 F.2d 1040, n 36 (hospital construction); Pathman Const. Co. v. Knox County Hospital Ass‘n., supra, 326 N.E.2d at 852-53.17 Beyond this jurisdictional claim, the Hospital‘s basic argument is that its own Architect had been negligent in handling this dispute, giving rise to a cause of action in its favor against the Architect for any liability herein and that this controversy between the Hospital and the Architect is, like the controversy in Sibley v. Tandy Corp., 547 F.2d 286, 287 (5th Cir. 1977), “inextricably intertwined and incapable of severance” from the controversy between the Hospital and Mercury. However, as we have seen, the federal authorities are clear that this is not a ground for denial of arbitration of a dispute embraced within the arbitration clause of the contract. The addition of the Architect as a party defendant might prevent removal of the state action as the district court ruled (though, on this, we express no opinion) but it certainly could not frustrate Mercury‘s plain, indisputable right to an arbitration of its dispute with the Hospital. See Sibley v. Tandy Corp., supra, 547 F.2d at 287, and other cases cited supra on this point. Moreover, any claim of untimeliness, waiver or laches (as distinguished from inconsistent legal action of which there is no claim in this case and which, under the rule stated in N&D Fashions, is for the court) is for the arbitrator and may not be an excuse for non-arbitrability. See Halcon Interna-
As we have said, the Hospital‘s objection to the exercise of jurisdiction in this case to afford Mercury its clear right to arbitrate was that there is a state court proceeding involving the same issues and that, in the interest of judicial economy and convenience, the federal court should stay its hand and defer to the state court, since the state court is as able as the federal court “to determine whether federal law with regard to arbitration applies in the instant situation.”18 For this position the Hospital places its principal reliance on Will v. Calvert Fire Ins. Co., 437 U.S. 655, 98 S.Ct. 2552, 57 L.Ed.2d 504 (1978). We think the reliance misplaced.
In Will v. Calvert, the plurality opinion was written by Justice Rehnquist, who emphasized that the Court was dealing with the appeal as one in mandamus and not on direct appeal and that the right to relief in mandamus required a clearer showing than a showing on direct appeal. Under established rules, Justice Rehnquist declared that mandamus could issue only if the party seeking it had a “clear and indisputable right” to have its claims adjudicated in a federal forum, and the right to such relief was one within the court‘s discretion. He extended the holding in Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), which would deny deference to a concurrent state proceeding if the issue was one “of substantive federal law,” to cover deference in favor of concurrent state proceedings which involved federal law and he dismissed Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976) with its dictum that reminded federal courts of their “unflagging obligation” to exercise their jurisdiction because there had been no final decision in that case. He concluded by finding that since the issuance of a writ of mandamus is discretionary “it cannot be said that a litigant‘s right to a particular result [in the exercise of that discretion] is ‘clear and indisputable.’ ”19
The critical opinion in this case, however, was that of Justice Blackmun. He was the “swing-man” between Justice Rehnquist‘s opinion and that of Justice Brennan. Justice Blackmun voted with Justice Rehnquist only to the extent of vacating the writ of mandamus but, unlike Justice Rehnquist, he did so solely in order to permit Judge Will to reconsider his order in the light of Colorado River. He questioned the plurality opinion‘s treatment of Brillhart and of Colorado River, as authorizing the broad discretion of the district court tо defer found by the plurality, for whom Justice Rehnquist spoke. In essence, he agreed largely with the result reached by Justice Brennan in his dissenting opinion except that he would have left the decision to Judge Will to determine whether there were such “exceptional circumstances” as would, under Colorado River, permit the district court to depart from its “unflagging obligation” to exercise its jurisdiction. Accordingly, the real decision in Will was that a federal court being seized of jurisdiction of a case, was not to stay its proceedings in deference
Thus, in Calvert Fire Ins. Co. v. Will, 586 F.2d 12 (7th Cir. 1978), the Court of Appeals, on remand, summarized its construction of the several opinions of the Supreme Court in Will thus (586 F.2d 14):
“Justice Blackmun‘s view is that, in the context of a petition for a writ of mandamus, we should have merely required the district court to reconsider its action in light of Colorado River rather than ourselves determining whether Colorado River compelled the district court to immediately adjudicate Calvert‘s federal claims.
“Since the four Justices who joined Justice Brennan‘s opinion believed that under Colorado River the district court now has a clear obligation to immediately adjudicate Calvert‘s federal claims, it follows logically that these four Justices would favor going at least as far as Justice Blackmun and require the district court to determine whether its earlier deferral to concurrent state proceedings is now correct. Calvert is therefore arguably entitled to an order requiring the district court to reconsider its actions in this case in light of Colorado River.
“The district court, however, in its statement filed with this court on remand, has indicated that it intends to follow such a course on its own motion. There is therefore no need for this court to take any further action.”
In Calvert Fire Insurance Co. v. American Mut. Reins. Co., 459 F.Supp. 859 (N.D. Ill., E.D. 1978), which was the decision of Judge Will on remand, Judge Will construed the decisions in Will exactly as had the Court of Appeals in 586 F.2d at 14, and he proceeded to apply the rule that limited deference to a concurrent state action to situations presenting very “exceptional circumstances.” He found that there were “exceptional circumstances” in the case under review justifying the stay. In reaching that conclusion he said that the state аction, involving a matter controlled by state law, was filed six months before the federal action and he found that, later when filed the federal action was no more than a “reactive defensive maneuver,” simply “a tactical maneuver to delay the determination of whether or not Calvert owes the pool its share of the 1974 losses,” and a mere “tactical defensive action in which the only exclusive federal claim is a contrived one.”20 It was on that basis and on that basis alone that Judge Will determined to stay the federal action.
It is manifest that Mercury‘s action was not a “contrived” federal claim asserted only in order to delay the resolution of the controversy nor was it a “reactive” or “tactical maneuver” for such purpose. The charge of a “contrived” action is more appropriately applied to the Hospital‘s state action. After negotiating for months both through its Architect and later its attorneys with respect to the claim and, though giving the clear impression that it earnestly desired to settle amicably the controversy without arbitration, the Hospital suddenly, without any forewarning, advised Mercury on October 8 that it was filing immediately a suit in the state court in order to enjoin arbitration. It is only fair to assume that this was to take advantage of the decisions of the North Carolina Court of Appeals which would deny interstate commerce character to the contract in question. It joined as a codefendant its own agent, the Architect, and again it seems fair to assume that this was to avoid removal of the action to the federal court. But, even assuming there is some controversy between the Hospital and the Architect, to which Mercury is not a party, 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 sol-
“When one party reveals a disinclination to resort to arbitration or any phase of suit involving all parties, those parties are prejudiced by being forced to bear the expenses of a trial, which in this case is quite lengthy. Arbitration is designed to avoid this very expense.”
There are no “exceptional circumstances” justifying the action of the district court in deferring in favor of the state court and certainly the district court stated none. Nor could it do so, on the basis of the conceded record here.21 The only apparent reason for the Hospital‘s precipitate resort to its state action was an attempt to foreclose any resort by Mercury to arbitration in the federal court under federal law, and to litigate the right to arbitrate under state law, all on the premise that the contract in question did not involve “interstate commerce.” This view of the nature of the contract has been declared by the Court of Appeals of North Carolina in two recent cases.22 In these cases the Court of Appeals of North Carolina held that under facts similar to those here the pertinent construction contract was not “in interstate commerce.” If this construction of the contract of the parties in this case were adopted, the rights of the parties would not be governed by the Federal Arbitration Act, but by state law, which is the Hospital‘s basiс position. Such a construction of the contract is, as we have seen, contrary to all relevant federal decisions, including decisions of the very court which stayed the federal proceedings in this case.
The Hospital seeks to answer this argument by arguing that, if the contract is held to be in interstate commerce, the North Carolina arbitration statute would apply and it is similar to the Federal Act. Thus, whether in the state court or in the federal court, the proceedings, according to the Hospital, would be the same. North Carolina it is true has adopted the Uniform Arbitration Act, Article 45A,
This is a case where it can be fairly said to be doubtful whether the rights of Mercury as fixed by “federal substantive law” will be recognized in the state court. Certainly, if the North Carolina court adheres to its view that contracts such as the one here are not “in commerce,” or construes the terms of the Uniform Arbitration Act with the severe rigidity it has in arbitration cases prior to the State‘s adoption of the Uniform Arbitration Act, Mercury will not be accorded the benefit of the “substantive federal law” developed in the federal court for the application of the Federal Arbitration Act. The loss of its rights as established by federal “substantive law” in arbitration demands that the district court not defer here. Even the plurality opinion in Will would not suggest deference where it was not clear that the state courts would apply controlling federal law as mandated under the Supremacy Clause. We do not think the mere fact that North Carolina has recently enacted the Uniform Arbitration Act constitutes such an “exceptional circumstance” as would preclude Mercury‘s right to a federal forum for the exercise of a federal right.
It should be added that refusal by the district court to defer to the state action сould not prejudice either party. There has been no action taken in the state action. It is in exactly the same posture as the federal action. The real point of difference is that the federal courts have a body of precedent governing the actions; the North Carolina courts have none. Both actions are controlled by federal, not state, law. If expedition of the resolution is the desideratum, then plainly every consideration favors federal jurisdiction over state jurisdiction, particularly since federal law is controlling.
Unlike Judge Will in Calvert, the district court found no “exceptional circumstances” justifying a departure from the Colorado River rule of “unflagging obligation” of the federal court to maintain federal jurisdiction, despite the pendency in state court of a similar action between the parties. Without such finding of “exceptional circumstances,” the district court had no right to stay the federal proceedings in this case. This is the teaching of Will v. Calvert as construed by Judge Will and by the Seventh Circuit. That right is not to be defeated by “forum-shopping,” which operates, whether intentional or not, to defeat Mercury‘s plain federal right to arbitration and to deny it a right to a federal forum for thе redress of a federal right by a far-fetched claim in a cause of action in the state court by the Hospital against its own agent for alleged delinquencies for which Mercury had no responsibility.
Accordingly, the judgment of the district court is reversed and the cause is remanded to the district court with directions to proceed in conformity herewith.
WIDENER, Circuit Judge, dissenting:
I respectfully dissent for the reasons sufficiently stated by Judge Hall, and I would add a word in joining his opinion.
As Judge Hall has pointed out for State court decisions, the only federal courts of appeal to consider the question have uniformly decided that cases under the Federal Arbitration Act must be decided by State courts when called upon. Commercial Metals Co. v. Balfour, Guthrie & Co., Ltd., 577 F.2d 264 (5th Cir. 1978); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir. 1959), cert. dismissed, 364 U.S. 801.
As the opinion of the majority does not emphasize, this is not, and may not be, a case of federal question jurisdiction. We have so held only recently in Sine, et al v. Local No. 992, etc., 644 F.2d 997 (4th Cir., 1981), and the statute specifically so provides,
“The Senators and Representatives before mentioned, and the Members of the State Legislatures, and all executive and judicial Officers, both of the United States and of the several States, shall be bound by Oath or Affirmation, to support this Constitution; ....”
As it has said before, in Sumner v. Mata, 449 U.S. 539, 549, 101 S.Ct. 764, 770, 66 L.Ed.2d 722 (1981), the Court stated:
“State judges as well as federal judges swear allegiance to the Constitution of the United States, and there is no reason to think that because of their frequent differences of opinion as to how that document should be interpreted that all are not doing their mortal best to discharge their oath of office.”
That statement applies, of course, to the construction of federal statutes.
The mere fact that one of the parties here does not desire arbitration, while the other does, does not mean that the party who desires arbitration is necessarily right and the party who opposes it is necessarily wrong. It is simply that, as in every lawsuit, there is a difference of opinion.
Indeed, if there is any forum shopping in this case and if such is somehow or another iniquitous, which I doubt, it is equally on the part of the federal plаintiff. The federal plaintiff (Mercury) was a State court defendant. Even assuming that the North Carolina Supreme Court would find that the contract involved here was not in interstate commerce, and thus the Federal Arbitration Act would not apply because of the two intermediate court decisions,1 there is no reason given nor is any speculation possible that the North Carolina courts would not have enforced the North Carolina Arbitration Act had the federal plaintiff (Mercury) only requested it in that proceeding.2 Thus, the federal plaintiff would have already achieved the arbitration it now so zealously asks us to impose on the other party. Because it did not take the simple and direct route of previously getting the arbitration that it now says it wants, the only logical conclusion is that it wished a federal forum to decide the question of whether or not to arbitrate as well as to review the decision of the arbitrators.
In line with these thoughts, I note that the owner, the contractor, and the architect, each of whom blames the others for the difficulties at hand, were all parties in the State court proceeding and thus complete relief could have been given. All are not partiеs to the federal proceeding and thus complete relief may not be given.
When I add these reasons to those given by Judge Hall, I am more firmly of opinion that the district court did not abuse its discretion in awaiting action on the part of the State court, which is all that it did. 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.
I am authorized to say that Judge HALL joins in this opinion.
K. K. HALL, Circuit Judge, dissenting:
I am at a loss to understand how the majority could have strayed so far afield in its resolution of this case. We have been called upon to determine whether the district court properly exercised its discretion by deferring to the state court. Rather than addressing this question, the majority concentrates on tangential matters which are not ripe for adjudication and which serve only to divert attention from the true controversy.1
This controversy is a product of the parallel legal proceedings instituted by the parties. Initially, the Hospital filed a declaratory judgment action in state court seeking a declaration of its rights and liabilities under the construction contract. The Hospital alleged, among other things, that Mercury was not entitled to invoke the arbitration clause of the contract because it had waived arbitration, and was otherwise prohibited by laches and estoppel. In response, Mercury asserted its right to arbitration.
Although North Carolina provides by statute a means for compelling arbitration,2 Mercury nevertheless filed in federal court a petition to compel arbitration pursuant to the Federal Arbitration Act and a petition to remove the state action to federal court. The district court judge denied removal and declined to rule on the petition to compel because the identical issues were already before the state court. Mercury now asks us to decide whether the district court properly stayed its consideration of the petition to compel arbitration pending the outcome of the parallel state proceeding.
When analyzing this question, we must remember the nature of the case and its procedural posture. The identical issues of arbitration and waiver have been presented to both a state and federal court. The parties to the arbitration agreеment are before both courts, and each court has statutory authority to compel arbitration.3
The Federal Arbitration Act does not specify the obligations of the district judge when confronted with a parallel state proceeding. Of the various provisions of the Act, Section 4 comes the closest to governing this situation.4 That section requires the court to consider a petition to compel and then to either order arbitration or, if necessary, to entertain certain specified challenges to the agreement. The clear Congressional purpose behind these directives is to expedite the arbitration process by requiring prompt action by the court. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967).
In this case, howеver, the purpose of Section 4 will be competently and authoritatively implemented by the state court. It would serve no purpose to read into Section
We next turn to the Supreme Court‘s landmark decision in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), in which the Court developed several principles and standards for gauging the propriety of a federal court‘s deferral to a state court. The Court stated that, as a general rule, “the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction ....” Id. at 817, quoting McClellan v. Carland, 217 U.S. 268, 282 (1910). The Court further observed that the federal district courts have a “virtually unflagging obligation” to exercise the jurisdiction given them. 424 U.S. at 817. However, the Court also recognized the importance of wise judicial administration, conservation of judicial resources and the comprehensive disposition of litigation, and found that exceptional circumstances would justify deferral by the federal court. Those circumstances include: (1) the prior assumption of jurisdiction over the res by state court; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; and (4) the order in which jurisdiction was obtained by the concurrent forums. Id. at 818.
Such exceptional circumstances are present here.5 As discussed earlier, the waiver issue was first presented to the state court, which has the authority and competence to provide appropriate relief. A stay of the federal action gives proper deference to the prior jurisdiction of the state court and eliminates the possibility of duplicative effort and conflicting results. Further, the state court, having jurisdiction over both the arbitration issue and the substantive action on the merits, is in a better position to bring the entire litigation to a prompt conclusion.
Despite these strong considerations, the majority concludes that the federal court must rule upon Mercury‘s petition because “federal substantive law” gives Mercury the right to arbitrate the Hospital‘s waiver defenses. The majority overlooks the fact that we do not know the basis for these defenses because this case is still in the pleading stage, and therefore we cannot know whether the defenses are of an arbitrable nature. Nevertheless, the majority jumps to the conclusion that arbitration would immediately ensue, and in the process forgets that we are supposed to be deciding which court will make that very determination. In other words, with a near total ignorance of the surrounding circumstances, the majority has ruled upon Mercury‘s petition to compel arbitration and has used that ruling to admonish the district court for not acting in the first place.
I suspect the majority‘s primary fear is that the Hospital has attempted to deprive Mercury of its access to a federal forum. The majority refers ominously to the filing of the state action as intended “to defeat arbitration,” and labels the joinder of the architect-agent as a ploy to avoid diversity. These inferences ultimately compel the majority to accuse the Hospital of filing “a contrived action” and forum-shopping.
The more reasonable explanation for these acts is that after months of negotiations, and having discovered the possible misfeasance of its architect, the Hospital decided it had better litigate its cause. The Hospital did so in state court so that it
In the final analysis, the majority has combined a form of bootstrap logic with misconceptions of bad faith to reach a conclusion which is supported neither by law nor fact. For these reasons, I dissent.
UNITED STATES of America, Appellee, v. Joseph E. SHAMY, Appellant.
No. 80-5056
United States Court of Appeals, Fourth Circuit
Decided Aug. 13, 1981.
Argued Feb. 6, 1981. Rehearing and Rehearing En Banc Denied Sept. 25, 1981.