/>iThe use of arbitration clauses in employment and consumer-related contracts is ubiquitous. California law requires companies facing employment and consumer claims in arbitration to pay arbitration fees and costs within 30 days of being invoiced by the arbitration provider.
But what happens when the company fails to pay those fees timely? Does it automatically risk losing the right to arbitrate and open itself up to having the dispute resolved in court rather than in a private arbitration proceeding? Until now, courts and litigants have interpreted the failure to pay timely as an automatic loss of arbitration rights, regardless of the reason for late payment. Some California courts, meanwhile, held that the rule didn’t even apply, because it was preempted by the Federal Arbitration Act (FAA).
In Hohenshelt v. Superior Court, the California Supreme Court put both of these questions to bed. The Court confirmed that under California Code of Civil Procedure section 1281.98, in employment and consumer arbitration matters, if the party who drafted the arbitration agreement doesn’t pay arbitration fees and costs within 30 days of the due date, it does not lose the right to proceed in arbitration so long as the failure to pay was based on a good faith mistake, inadvertence, or other excusable neglect . On the other hand, if the company’s failure to pay was willful, grossly negligent, or fraudulent, the right to arbitrate will be waived.
The Court addressed challenges to this provision, which was argued to be unduly harsh and preempted by the FAA. The Court found that section 1281.98, when properly construed, only strips arbitration rights from parties engaging in strategic nonpayment of fees. “[W]e find no indication that it intended to strip companies and employers of their contractual right to arbitration where nonpayment of fees results from a good faith mistake, inadvertence, or other excusable neglect,” the Court stated.
While acknowledging that section 1281.98 provides no explicit exceptions for untimely payment, the Court highlighted that its apparent harshness is mitigated by existing laws:
- California Civil Code section 3275: Allows relief from forfeiture if the breaching party compensates the other party, unless the breach was grossly negligent, willful, or fraudulent.
- Civil Code section 1511: Excuses breaches when performance becomes impossible, illegal, or impracticable due to extreme difficulty, expense, or loss.
- Civil Code section 473(b): Permits courts to relieve parties from judgments or orders due to mistake, inadvertence, surprise, or excusable neglect.
Because the Legislature's intent was to address willful nonpayment that obstructs arbitration, not to limit relief available under California law, these California provisions are not displaced in the application of Section 1281.98. When harmonized with existing California laws, Section 1281.98 does not automatically result in forfeiture of arbitration rights and is thus not preempted by the FAA. Whether the United States Supreme Court might think differently is an open question.
Conclusion:
While upholding section 1281.98, the Supreme Court has significantly softened its impact. Waivers of arbitration rights under this section are no longer absolute; defendants can seek relief through California law, provided their failure to pay is not grossly negligent, willful, or fraudulent. Although this brings hope to California litigants, there is no guarantee of relief or certainty in how courts will apply these provisions, so the imperative to timely pay arbitration fees remains unchanged.
