United States: General Contractor May Be Liable For Subcontractor’s Failure To Assign Work As Required By Project Labor Agreement

Last Updated: May 8 2014
Article by F. Keith Covington

In Sheet Metal Workers Int'l Ass'n Local Union No. 27 v. E.P. Donnelly, Inc., the United States Court of Appeals for the Third Circuit (the court supervising federal trial courts in Pennsylvania, Delaware, and New Jersey) recently held that a general contractor on a project governed by a Project Labor Agreement ("PLA") may be held liable for the failure of its subcontractor to assign work as required by the PLA. This case serves as an important reminder that a general contractor or construction manager who is a signatory to a PLA must be diligent to ensure that its subcontractors are in full compliance with the PLA's requirements.

Sambe Construction Company, Inc. ("Sambe") was the general contractor on a project for the construction of a community center for Egg Harbor Township in Atlantic County, New Jersey. The Township adopted a PLA governing the terms and conditions of the project's construction. All contractors on the project were required to become signatories to the PLA. Sambe executed the PLA and subcontracted the roofing work on the project to E.P. Donnelly, Inc. ("Donnelly")

The PLA required Sambe to require its subcontractors "to accept and be bound by the terms and conditions" of the PLA by executing a letter of assent, and imposed on Sambe an obligation to "assure compliance" with the PLA by its subcontractors. Sambe obtained the letter of assent from Donnelly, who further agreed that any party it selected to do the roofing work would also be required to become a signatory to the PLA.

Despite this letter of assent, Donnelly selected the United Brotherhood of Carpenters and Joiners of America, Local 623 ("Carpenters Local") to perform the roofing work, even though Carpenters Local was not a signatory to the PLA. The Sheet Metal Workers' International Association, Local 27 ("Sheet Metal Local"), which was a signatory, protested the work assignment, arguing that Carpenters Local could not continue the roofing work because it had not executed the PLA. Donnelly had previously signed a separate collective bargaining agreement with Carpenters Local and refused to reassign the work on the project to Sheet Metal Local.

Sheet Metal Local initiated arbitration under the PLA and an arbitrator issued a decision awarding the roofing work to Sheet Metal Local. Carpenters Local threatened to picket the project if Donnelly did not continue to assign the work to Carpenters Local. Donnelly then filed an unfair labor practice charge with the National Labor Relations Board ("NLRB") alleging that Carpenters Local's threats to picket violated the National Labor Relations Act ("NLRA").

In the meantime, Sheet Metal Local filed a lawsuit in the U.S. District Court for the District of New Jersey, seeking enforcement of the arbitration award, a reassignment of the roofing work to Sheet Metal Local, and declaratory and monetary relief against Sambe, Donnelly, and Carpenters Local for breach of contract under Section 301 the Labor Management Relations Act.

After a hearing, known as a 10(k) hearing, on the work jurisdiction dispute, the NLRB issued a decision resolving Donnelly's unfair labor practice charge. The NLRB entered an order awarding the disputed roofing work to Carpenters Local.

Notwithstanding the NLRB's award, Sheet Metal Local continued to pursue its Section 301 lawsuit. Donnelly then filed a second unfair labor practice charge with the NLRB, this time against Sheet Metal Local, claiming that Sheet Metal Local's continued maintenance of the lawsuit against Sambe and Donnelly violated the NLRA because it sought reassignment of the roofing work in contravention of the NLRB's 10(k) award in favor of Carpenters Local. Following a hearing, an administrative law judge found that Sheet Metal Local's continued pursuit of the Section 301 lawsuit was a violation of the NLRA.

After the project was completed, Sheet Metal Local amended its Section 301 suit. Sheet Metal Local now sought monetary damages against Sambe and Donnelly for breach of contract under the PLA. The U.S. District Court entered summary judgment against both Sambe and Donnelly and awarded Sheet Metal Local $1 in nominal damages against Sambe and (after a bench trial) $365,349.75 in compensatory damages against Donnelly.

The NLRB ultimately confirmed the administrative law judge's decision that Sheet Metal Local's Section 301 lawsuit, as against Donnelly, was an unfair labor practice because that lawsuit "directly conflict[ed]" with the NLRB's 10(k) award and it ordered Sheet Metal Local to withdraw the lawsuit against Donnelly in its entirety. However, it reversed the administrative law judge's decision as to Sambe, finding that the lawsuit against Sambe, the general contractor, did not violate the NLRA.

In consolidated appeals, the Third Circuit reviewed both the U. S. District Court's rulings in the Section 301 suit and the NLRB's decision on Donnelly's unfair labor practice charge. The Third Circuit upheld the NLRB's decision that Sheet Metal Local's Section 301 suit against Donnelly constituted an unfair labor practice. The Court expressly noted, however, that its holding applied only to a suit against an employer making the disputed work assignment and not to those against non-assigning general contractors (like Sambe). In making this distinction, the Court found significant that only the employer actually making the work assignment is subject to the conflicting demands of the Section 301 suit for damages, on the one hand, and the NLRB's 10(k) order, on the other.

The Third Circuit then found that the District Court had erred in finding in favor of Sheet Metal Local on its contract claim against Donnelly, vacated the $356,349.75 award, and remanded to the U.S. District Court with instructions to enter judgment in Donnelly's favor. The Third Circuit stated that this result was compelled by its decision to enforce the NLRB's order on Donnelly's unfair labor practice charge because, under that decision, Sheet Metal Local was "prohibited from the continued maintenance of [its] Section 301 suit."

The Third Circuit also held that the District Court's order granting summary judgment against Sambe on Sheet Metal Local's breach of contract claim was improper. However, instead of ordering a judgment in Sambe's favor, it remanded the claim against Sambe to the District Court for a determination on the issue of contract liability. Relying again on the fact that Sambe was not the employer who actually assigned the disputed work, the Third Circuit refused to find that Sheet Metal was prohibited from pursuing the Section 301 suit against Sambe on the basis of the NLRB's 10(k) award. Instead, in deciding the issue of contractual liability, the District Court was ordered to make a factual determination as to whether Sambe had acted sufficiently to "assure compliance" of the hiring requirements by Donnelly as required by the PLA. The Third Circuit did not specifically address the issue of damages and it is unclear whether the District Court will limit its damage award to the $1 in nominal damages previously awarded in the event it ultimately concludes, on remand, that Sambe breached the PLA.

What is clear is how important it is for a general contractor to make sure its subcontractors are in full compliance with the terms and conditions of a governing PLA. It is likely not sufficient simply to have the subcontractors sign the PLA. The general contractor should also take affirmative steps to ensure that its subcontractors are actually assigning work as required by the PLA and otherwise complying with the terms of the PLA. Such steps could include obtaining appropriate representations and warranties – along with a right to indemnity for breach – from the subcontractors. Otherwise, and somehow ironically, it will likely be the general contractor who actually "pays the price" if one of its subcontractors ignores the PLA's requirements.

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