A federal appeals court has handed labor unions what appears to be a major victory, making it harder for companies to use bankruptcy proceedings to throw out existing collective bargaining agreements.

The 3rd U.S. Court of Appeals ruled Wednesday that a bankruptcy court judge erred when he allowed the Wheeling-Pittsburgh Steel Corp. to terminate its contract with the United Steelworkers. The company had claimed that scrapping the contract and imposing a new agreement with lower wages was necessary for the firm's survival.

A three-judge panel said the bankruptcy judge's decision was not supported by the law, which imposes two tests -- necessity and fairness -- on employers seeking to unilaterally cancel a union contract.

Congress amended federal bankruptcy laws in 1984, adding those tests to make it harder for employers to abrogate labor agreements.

"This is the first significant appellate court test of the meaning of the bankruptcy amendments," said David Silberman, assistant general counsel for the American Federation of Labor & Congress of Industrial Organizations.

"The view of the amendments taken by the lower courts would have given them fairly limited reach," he said.

The appeals court said it was not clear either that Wheeling-Pittsburgh's proposed contract changes had been "fair and equitable" or that they were necessary for successful reorganization under Chapter 11 of federal bankruptcy laws.

"The major problem was they were insisting on a five-year agreement with no up-side if the company turned prosperous. That wasn't necessary for the company's recovery," said Carl Frankel, associate general counsel for the steelworkers union.

The union was represented by attorney Mike Gottesman of Bredhoff and Kaiser.

Wheeling-Pittsburgh has been reorganizing since April 1985. In July 1985, the company terminated its contract with the steelworkers and cut wages and benefits, touching off a 98-day strike that further damaged the company financially.

The strike ended only after Wheeling-Pittsburgh chairman Dennis Carney agreed to resign. "Had the bankruptcy court not improperly rejected the contract, the lengthy work stoppage could have been avoided," said Andrew Palm, who heads the union's negotiating committee with Wheeling-Pittsburgh.

A spokesman for Wheeling-Pittsburgh said the company's lawyers had not seen the decision and that, as a result, the company had no reaction to it. The union and the steel company have agreed to honor their existing contract, notwithstanding the outcome of the litigation about the canceled contract.

Congress stepped in to try to make it harder for employers to abrogate contracts with their workers after a Supreme Court ruling in February 1984 that allowed companies to do so. The amendments adopted in response to the Supreme Court ruling said that, before an employer can repudiate a contract, the employer must make a proposal to the union and bargain in good faith to try to reach an agreement. The court must decide whether the proposal is necessary for the company's health and whether it is fair to all parties.

Wheeling-Pittsburgh's proposal was based on a "worst-case" scenario, setting wages based on the possibility that everything that would go wrong in the industry and for the company.

Circuit Judge Dolores K. Sloviter, writing for the court, said U.S. Bankruptcy Judge Warren W. Benz was wrong when he decided in July to authorize the company to dissolve its contract with the union 13 months before it would have expired and to unilaterally roll back wages.

The bankruptcy judge "failed to give any persuasive rationale for the disproportionate treatment of the employes who were being asked to take a five-year agreement under a worst-case scenario without any possibility for restoration or share in the event of a better-than-anticipated recovery."