May Delay in Satisfying an Arbitration Award Give Rise to a New Independent Claim in Arbitration?

An almost 15-year-long Russian employment dispute continues to play itself out both in U.S. federal court and before the International Centre for Dispute Resolution of the American Arbitration Association (AAA).

The case illustrates well the tactics used by losing parties to delay enforcement by seeking to vacate or otherwise challenge an international arbitration award.  It shows, however, that the language in the arbitration clause that arbitration be “final and binding” may provide an additional mechanism for compelling losing parties to more promptly satisfy their obligations.

The story of Russian national Peter Prostyakov suggests that protracted appeals as to the conclusiveness of arbitration awards may give rise to new and independent arbitration claims, based on a separate breach of the arbitration clause.

Russian national Peter Prostyakov was hired by a US company Masco company to head up its Moscow Office.  Eventually, his business relationship with the Masco deteriorated, and Prostyakov was asked to leave.  Prostyakov and his employer subsequently entered into a Settlement Agreement, containing arbitration provisions subject to Indiana law.

Prostyakov and Masco agreed that their business relationship was ending “amicably,” and would be communicated to interested third parties as such.  However, when Prostyakov sought employment elsewhere, Masco delayed providing his Labor Book (trudovaya knizhka), a requirement under Russian law,  containing a written record of one’s employment history and a prerequisite document to new employment.  When Prostyakov finally recovered his Labor Book, it contained a back-dated entry stating that he had been fired.  Based on this, Prostyakov initiated arbitration seeking both monetary and equitable relief.

Masco refused to arbitrate, and so Prostyakov turned to court in Russia, alleging Masco had violated the Russian Labour Code with its backdated and falsified Labor Book entry.  After several years, a default judgment was entered in Prostyakov’s favor.  Armed with this decision, Prostyakov returned to arbitration in the United States.  A single arbitrator returned a decision in Prostyakov’s favor, awarding him more than half a million dollars in damages, attorneys’ fees and costs, and directed Masco to correct the Labor Book.

Prostyakov petitioned the United States District Court in Indiana to confirm the arbitrator’s award. Masco opposed it, arguing that the arbitrator lacked the authority to order the equitable relief of reforming the Labor Book.  Prostyakov again prevailed, and in turn, Masco appealed to the Seventh Circuit Court of Appeals.  Masco lost again.

Recent Developments

After the Seventh Circuit Court of Appeals decision, the parties began negotiating the amount to be paid by Masco in order to satisfy the judgment and attorneys’ fees.  Masco paid approximately one million dollars.  However, Prostyakov refused to accept Masco’s tender of the final payment of thirty thousand dollars, instead asserting additional claims now 11 years after the first actionable misconduct.  Masco requested a federal court in Indiana to rule it had satisfied the award in full.  The Court agreed.

In 2009, Prostyakov brought a second arbitration, asserting that because the arbitration clause between the parties stated that arbitration will be “final,” Masco’s delay in payment and appeals following entry of the arbitration award constituted an ongoing and independent breach of the Settlement Agreement.

In response, Masco filed a new suit in a federal court seeking declaratory judgment that the prior satisfaction of the arbitration award was res judicata as to any claims Prostyakov might assert.  The Court considered the claims, and although dubious of Prostyakov’s eventual chances for success on the merits, determined that this was a decision for the arbitrator to render.

Currently, that new arbitration is pending before Arbitrator J. Lee McNeely of the AAA and the ruling is expected this month.

Benjamin Ellison