Arbitration remains the preferred mechanism for many employers and businesses to resolve workplace and consumer disputes. However, California legislation, namely Code of Civil Procedure, section 1281.98, and recent cases construing it strictly, introduced procedural hurdles that jeopardized the enforcement of arbitration agreements. In Hohenshelt v. Superior Court, the California Supreme Court clarified the standards that apply to this situation, addressing whether (1) the Federal Arbitration Act (FAA, 9 U.S.C., § 1, et. seq,) preempts Code of Civil Procedure section 1281.98, a provision of the California Arbitration Act (CAA, Code Civ. Proc., § 1280 et. seq.) that governs the timely payment of arbitration fees in employment and consumer disputes; (2) section 1281.98 should be strictly construed as effectuating the waiver of a party’s right to enforce arbitration if payment for the same is even one day late; and (3) section 1281.98 is applicable when an arbitration agreement unambiguously calls for enforcement of the same under the FAA.
The California Supreme Court rejected the rigid approach applied by many appellate courts that interpreted section 1281.98 as imposing a strict, unforgiving deadline that automatically stripped employers and companies of arbitration rights for late payments, regardless of the reason for the delay. Instead, the Court emphasized that California contract law has long recognized that waiver of contractual rights occurs only when a failure to perform is willful, grossly negligent, or fraudulent. Good faith mistakes, inadvertence, or excusable neglect do not automatically result in loss of the right to arbitrate. Based on this interpretation of the statute, the Court held that it was not preempted by the FAA. The Court declined to fully resolve whether section 1281.98 could apply at all to an arbitration agreement governed fully by the FAA. However, Justice Groban’s concurring opinion provides some insight into the potential outcome of that issue.
In a partial win for employers and businesses, the case means there are grounds for avoiding waiver of arbitration rights when payment for the same is inadvertently late, as such issues must now be decided on a case-by-case basis.
Section 1281.98 and Its Interpretation Prior to Hohenshelt
Section 1281.98, which was enacted in 2019 and subsequently amended, governs payment of fees by the drafting party (often, employers and businesses) with respect to employment or consumer arbitrations. The statute requires, in relevant part:
- The arbitrator to promptly issue invoices, due upon receipt, unless the agreement expressly states the number of days in which required fees must be paid.
- The drafting party to pay an invoice within 30 days, unless an extension of time is agreed upon by all parties.
- The arbitration provider to provide a copy of an invoice for fees and costs, along with notice of when an invoice is paid, to all parties, keeping employees and consumers apprised of the status of issuance and payment of invoices.
Under the statute, untimely payment by the drafting party is a material breach of the agreement and allows the employee or consumer to unilaterally elect to withdraw the claim from arbitration and proceed in court, recover attorney’s fees and costs associated with the abandoned arbitration proceeding, and seek other sanctions, including evidence, terminating, and/or contempt sanctions.
The statute had been construed by appellate courts as resulting in a type of strict liability, with a split in opinion regarding FAA preemption. Prior to Hohenshelt, any delay in payment resulted in material breach, regardless of the reason for delay.
Factual Background and Procedural History of the Case
Hohenshelt arose out of an employment lawsuit alleging Fair Employment and Housing Act and Labor Code claims. As a condition of employment, the parties entered into a pre-dispute arbitration agreement expressly governed by the FAA and JAMS rules. One year into the arbitration proceedings, the employer failed to timely pay invoices issued by the arbitrator. After the payment deadline lapsed, JAMS issued a notice of non-payment, though gave the employer an additional 28 days to pay the invoice.
Upon receipt of the notice of non-payment, the employee filed a motion in superior court, electing to withdraw his claims from arbitration and to proceed in court. The trial court denied the employee’s motion, based on its view that the arbitrator had seemingly set a new due date after the initial nonpayment, and the employer paid the same on time.
The appellate court reversed. It found that the trial court’s ruling ignored the language of section 1281.98, subdivision (a)(2), which required any extension of time to be agreed upon by all parties, i.e., the arbitrator could not unilaterally provide an extension. It also rejected the employer’s argument that section 1281.98 was preempted by the FAA. The California Supreme Court granted review.
Whether Section 1281.98 Applies to Agreements that Invoke the FAA Remains Unresolved
On appeal to the California Supreme Court, the employer argued that section 1281.98 (a provision of the CAA) did not apply because the parties unambiguously agreed in the arbitration agreement to be bound by the FAA and JAMS rules. The Court declined to address the argument, finding the employer forfeited the issue, and assumed the CAA applied for purposes of its analysis.
Justice Groban’s concurring opinion suggests the Court might find that 1281.98 applies despite the agreement invoking the FAA. Justice Groban reasoned that it has been a long-standing rule that CAA’s procedural rules apply by default to cases in California courts, meaning those outlined in section 1281.98 should apply in California proceedings absent an express indication in the agreement to the contrary.
Implicit in the concurring opinion is that section 1281.98 is a procedural, rather than substantive, rule governing arbitration, which impacts the FAA preemption analysis. While Justice Groban agreed with the majority’s analysis of preemption under the FAA’s equal treatment principle, he noted that this analysis will not always be necessary because when the CAA applies, no federal preemption concerns arise.
This is significant in multiple respects. There is no analog to section 1281.98 in the FAA. Arguably, invoking the FAA in an arbitration agreement should be sufficiently unambiguous to encompass both its substantive and procedural rules, rendering section 1281.98 inapplicable. However, under Justice Groban’s analysis, the agreement must expressly invoke both the FAA’s substantive and procedural rules to avoid the application of section 1281.98 and other CAA procedural rules.
Section 1281.98 Does Not Supersede Rules Regarding Relief from Waiver
While the Court held that section 1281.98 is not preempted by the FAA, the Court rejected the strict construction of the statute (in part, to ensure its interpretation did not result in preemption). It held that courts may excuse untimely payment under certain circumstances, providing an avenue of relief for employers and businesses from the draconian consequences of the statute.
The Court began by acknowledging that the statute states, without exception, that untimely payment is a material breach of the agreement, and that the statute has been applied strictly, regardless of whether the untimely payment was deliberate or inadvertent. However, the Court rejected this rigid construction because it “would raise preemption concerns” and instead construed the statute “‘in a manner that avoids any doubt about its [constitutional] validity.”
To do so, the Court determined that the language of the statute was not, by itself, dispositive of its operation and effect. Instead, the Court analyzed the statute against the “backdrop of longstanding statutes that authorize courts to prevent unjust forfeitures of contractual rights,” and concluded that there is no clear indication from the statute’s language or legislative history that the Legislature intended to limit the operation of the “legal backdrop.” The Court then construed the statute to make arbitration agreements enforceable on the same grounds as those that apply to other contracts with respect to untimely payment of arbitration fees.
The Court held that where untimely payment is not willful, fraudulent, or grossly negligent, a party may be relieved from forfeiting its right to enforce an arbitration agreement. To do so, a party must show that the delay was excusable under the standards of:
- Civil Code, section 3275 – a drafting party that has not acted willfully, fraudulently, or with gross negligence in making a late payment may be relieved from forfeiting their right to continue the arbitration upon making full compensation to the other party for any losses resulting from the delay;
- Civil Code, section 1511 – a breach may be excused when performance of the contractual obligation would be impossible, illegal, or impracticable because of extreme and unreasonable difficulty, expense, injury, or loss involved;
- Code of Civil Procedure, section 473 – a party or his or her legal representative may be relieved from an order against him or her through his or her mistake, inadvertence, surprise, or excusable neglect.
Importantly, this new standard does not apply to the mandatory monetary sanction under the statute, regardless of whether the untimely payment was willful.
Post-Hohenshelt Developments
Since the California Supreme Court's decision in Hohenshelt, lower courts have already begun applying its clarified standard to determine when a late arbitration payment constitutes forfeiture. Two recent appellate decisions, Wilson v. Tap Worldwide, LLC (2025) 114 Cal.App.5th 1077 and Wilson v. VXI Global Solutions, LLC (Cal. Ct. App., Oct. 7, 2025, No. B340615) 2025 WL 2837069, at *1, demonstrate the application of Hohenshelt.
In Tap Worldwide, the trial court granted plaintiff’s motion under section 1281.98 where defendant’s counsel initiated an electronic payment on the due date of the invoice, which was processed and received by the arbitration provider the following business day. The court of appeal held that the untimely payment was not strategic, willful, grossly negligent, or fraudulent, as a matter of law.
Similarly in VXI Global Solutions, the Court of Appeal extended the application to Sections 1281.97, which applies to arbitration initiation fees. There, defendant failed to make payment of fees as a result of miscommunication between the legal and accounting department, leading the legal department to incorrectly believe that payment had been submitted. While the Court of appeal reversed the order vacating arbitration, it affirmed the sanctions awarded to plaintiff for the cost of initiating arbitration and its motion to vacate under 1281.97.
Key Takeaways
While this is a partial win for employers and businesses, the severe consequences of a material breach of the arbitration agreement remain, despite the elimination of the strict liability standard previously applied. The case highlights the complexity and near constant evolution of law impacting arbitration, the importance of careful drafting arbitration agreements and navigating the laws governing arbitration and remaining vigilant in compliance with arbitration rules and procedures.
- Employers and businesses should consider expressly invoking the FAA’s procedural provisions and disclaiming the application of the CAA in their arbitration agreements and/or contracting for extended payment schedules.
- Employers, businesses and practitioners should implement reliable systems to ensure timely payment of arbitration invoices to avoid risk. If payment delays occur, maintaining records showing good faith efforts or excusable reasons can be critical in preserving the right to arbitration.
- Employers and businesses can obtain relief from untimely payment by showing they acted in good faith, giving some reasonable excuse for the delay, and tendering payment promptly and with reasonable diligence, though monetary sanctions may still be awarded under the statute.
- FAA preemption can still be argued in federal court. Federal courts are not bound by the California Supreme Court’s holding on federal preemption.
