labor relations

third circuit affirms decision empowering courts with authority to determine the arbitrability of labor disputes

By: greg trif & kyle h. cassidy, trif law llc

On September 14, 2020, the United States Court of Appeals for the Third Circuit, in the matter MZM Constr. Co. v. N.J. Bldg. Laborers Statewide Benefit Funds, affirmed a key threshold principle in arbitration law, finding that courts (as opposed to arbitrators) are generally empowered to determine whether parties are bound by an arbitration agreement. This decision is significant because most labor agreements contain arbitration provisions and, to the extent a dispute arises thereunder, contractors may have an opportunity to contest their arbitration obligations in court. Through its decision, the Third Circuit specifically recognized that contractors may challenge an arbitration clause in a labor agreement if there exists a valid basis to challenge the enforceability of the agreement itself, such as where there are allegations of fraud in the execution.

The case arises from a contractor’s use of a local labor union to perform work on a construction project at the Newark Liberty International Airport (“Airport Project”). During construction, the union’s representative allegedly approached the contractor, advising that the union did not have any agreement with the contractor for the Airport Project. Consequently, the union representative presented the contractor with a one-page short-form agreement (“SFA”), allegedly representing that the union would walk off the Airport Project if the contractor did not agree to sign it. The union representative also purportedly represented to the contractor that the SFA would only govern the contractor’s use of union labor on the Airport Project. Despite these alleged representations, the SFA contained language that incorporated by reference the terms of a Collective Bargaining Agreement (“CBA”) that extended to all New Jersey projects and contained a provision obligating all disputes be resolved through arbitration. Ultimately, the contractor executed the SFA to avoid a union walk-off while also believing that it only applied to the Airport Project.

Years later, and in connection with New Jersey projects other than the Airport Project, the union audited the contractor’s records and determined that $230,000 was due and owing. When the contractor challenged the basis of the audit, the union referred to the SFA and the language incorporating the CBA by reference. The union thereafter sought to collect the unpaid contributions by unilaterally scheduling an arbitration pursuant to the arbitration provision in the CBA.

The contractor subsequently filed an action with the Court seeking, among other things, to enjoin the arbitration from occurring and ultimately absolve itself of liability for the allegedly unpaid contributions. Central to the contractor’s action was the threshold issue of whether the court or arbitrator was authorized to decide the enforceability of the arbitration provision in the CBA. The District Court ultimately agreed with the contractor: (i) holding that the issue of arbitrability was for the court to decide; (ii) staying the pending arbitration; and (iii) authorizing expedited discovery to determine the extent to which the SFA was validly executed. The District Court reasoned that the court should decide the arbitrability issue because the contractor raised legitimate questions about its knowledge of the existence of any CBA and the arbitration clause therein. The union thereafter appealed the District Court’s decision to the Third Circuit.

On appeal, the Third Circuit affirmed the District Court’s decision, holding that “unless the parties clearly and unmistakably agreed to arbitrate questions of contract formation in a contract whose formation is not in issue, those gateway questions are for the courts to decide.” Stated differently, unless there is an undisputed agreement requiring the parties to arbitrate and resolve issues of arbitrability before the arbitrator, then the court (not the arbitrator) must decide the enforceability of an arbitration clause. In reaching this decision, the Court applied the Federal Arbitration Act, which is consistent with the rules imposed by the New Jersey Arbitration Act, both of which favor courts as the decider of questions about the formation or existence of an arbitration agreement. Going forward, unless an agreement

unmistakably provides otherwise, the District Court must determine whether the CBA and its arbitration clause are enforceable as against the contractor.

The circumstances of this case should serve as a reminder to all contractors to be cognizant of the terms of the contracts they sign, and particularly the agreements referenced therein. In addition, the decision presents a potential avenue, albeit limited, for contractors to avoid arbitration despite the existence of an arbitration provision in an operative agreement.

In addition to considering whether there exists a basis to challenge the enforceability of an arbitration provision, contractors should be mindful of the advantages and disadvantages of courtroom litigation verses arbitration. For example, litigating in court generally offers: (i) easier access to third party discovery/ testimony; (ii) appellate review; (iii) expansive discovery; and (iv)stringent rules of evidence. Conversely, arbitration generally provides: (i) quicker resolutions; (ii) a decision maker with knowledge of the industry; (iii) lower cost and fewer expenses; and (iv) confidential proceedings. Moreover, the COVID-19 pandemic may make one method of dispute resolution preferable to the other. For instance, contractors looking to quickly resolve their disputes may prefer arbitration because, due to COVID-19, many courts have been unable to conduct trials thereby creating a significant backlog and delay in the adjudication of matters. In contrast, arbitrations have proceeded through remote means of communication, allowing the parties to maintain more control over the resolution of their dispute.

Ultimately, contractors must consider whether they have a valid basis to challenge the enforceability of an arbitration clause in their labor or other agreements and, if courtroom litigation is preferrable, challenge the enforceability of such agreements in court.

About the Authors. . . . Greg Trif, a member of Trif Law LLC, represents developers, general contractors, subcontractors, and suppliers in all areas of law affecting the construction industry including contract claims, project crisis management, labor and employment disputes, and business torts.

Kyle H. Cassidy, an associate at Trif Law, LLC, represents contractors and subcontractors in all areas affecting the construction industry.