The Court declares that the Federal Arbitration Act created a “body of federal substantive law” such that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.”

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Moses H. Cone Memorial Hospital v. Mercury Constr. Co, 460 U.S. 1 (1983)
 

Relevant Facts: A hospital contracted with a building contractor and an architect to renovate its facilities. While the contract involving the building contractor included an arbitration clause, the contract with the architect did not. After a complicated dispute concerning the cost of the project arose, multiple legal actions were filed in both state and federal court, including motions to compel arbitration.

 

Question Before The Court: Whether state courts have the requisite jurisdiction to grant motions to compel arbitration under the Federal Arbitration Act (FAA); how far the nation’s federal policy favoring arbitration extends; and whether federal courts may defer to state courts when both are adjudicating parallel claims regarding the enforceability of an arbitration provision.

 

The Opinion: The Court focused on the FAA’s “statutory policy of rapid and unobstructed enforcement of arbitration agreements” and professed that Section 2 of the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act. . .. The [FAA] established that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself, or an allegation of waiver, delay, or a like defense to arbitrability.”

 

The Court was unmoved by the argument that, should the hospital be compelled to arbitrate its dispute with the building contractor, but not the architect against whom there was also pending litigation under the same facts, then it would have to resolve the two disputes in separate forums. To that point, the Court lamented that such misfortune “occurs because [the FAA] requires piecemeal resolution when necessary to give effect to an arbitration agreement. Under the [FAA], an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement.”

 

The Court expressed concern regarding the state’s ability to adequately protect the building contractor’s right to arbitration under the contract, observing “state courts, as much as federal courts, are obliged to grant stays of litigation under Section 3 of the [FAA]. It is less clear . . . whether the same is true of an order to compel arbitration under Section 4 of the Act.” The Court declined to go so far as establishing that state courts had the jurisdiction to do so. Still, the Court mused that, “if the state court stayed litigation pending arbitration but declined to compel the [objecting party] to arbitrate, [the party seeking to enforce the arbitration clause] would have no sure way to proceed with its claims except to return to federal court to obtain a Section 4 order.”

 

Over a series of footnotes, the Court explained, but did not resolve, an important issue arising from a conflict between federal subject matter jurisdiction and a state court’s ability to rule on FAA cases. The Court rightly observed that the FAA “is something of an anomaly in the field of federal court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal question jurisdiction under §28 USC 1331 or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue. Section 3 likewise limits the federal courts to the extent that a federal court cannot stay a suit pending before it unless there is such a suit in existence.”

 

At the time this case was decided, this discrepancy caused many courts to interpret the FAA to allow state courts to grant stays of proceedings under Section 3. Yet, a problem arose when a plaintiff would bring a wholly state level claim against another citizen of the same state before a state court. The FAA does not create any independent federal question jurisdiction under the Federal Rules of Civil Procedure, so when a state court granted a Motion to Stay, there was no way for a party seeking to compel arbitration to access the federal court to file the requisite Motion to Compel Arbitration. Although it failed to do so here, in the first case of its next term, Southland Corp. v. Keating, 465 U.S. 1 (1984), the Court directly addressed and resolved this issue when it held that state courts must enforce agreements subject to the FAA in the same manner as federal courts.

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