Late Fees, High Stakes: California Narrows Arbitration Fee Forfeiture Rule

In its August 11, 2025 decision in Hohenshelt v. Superior Court (S284498), the California Supreme Court clarified the reach of Code of Civil Procedure Section 1281.98, the 30-day arbitration fee payment rule. While reaffirming the statute’s deterrent purpose, the Court held it must be read alongside established contract and procedural relief doctrines, limiting forfeiture of arbitration rights to cases of willful, fraudulent, or grossly negligent nonpayment. Since its enactment, Section 1281.98 has generated extensive litigation over whether its strict 30-day arbitration fee deadline operates as an absolute bar or allows equitable relief, and whether it is preempted by the Federal Arbitration Act (FAA). Conflicting appellate rulings on these questions left uncertainty until Hohenshelt resolved the interpretive split.

California’s 30-Day Arbitration Fee Rule
Code of Civil Procedure Section 1281.98 (“Section 1281.98”) requires that in employment and consumer arbitrations, the drafting party, often the employer, must pay all fees and costs necessary to continue the arbitration within 30 days of the due date stated on the provider’s invoice. [1] Any extension must be agreed to by all parties. Failure to pay on time constitutes a material breach and default, allowing the employee or consumer to withdraw from arbitration, return to court, and seek both monetary and procedural sanctions. The statute further specifies that any extension of the payment deadline must be agreed to by all parties; an arbitrator’s unilateral extension does not, by itself, prevent a breach from occurring.

The Road to Hohenshelt

In Hohenshelt, an arbitration was being conducted under the California Arbitration Act (CAA). The employer duly paid initial arbitration fees at the outset of the arbitration but subsequently missed the statutory payment deadline for the invoice a few months before the arbitration hearing.  Although the employer missed the 30 day payment deadline based on the first invoice, but it paid the fees shortly thereafter and within 30 days of a subsequent notice from the arbitrator.   The employee seized on this small delay and moved to vacate the arbitration under Section 1281.98 and pursue the case in court.  The trial court sided with the employer and denied the motion to vacate, finding the payment timely under the arbitrator’s extended deadline. However, the Court of Appeal reversed, holding that the late payment triggered the statute’s breach provisions regardless of the reason for the delay or the arbitrator’s extension, because no mutual agreement to extend existed.

The California Supreme Court’s Approach

On review, the California Supreme Court declined to interpret Section 1281.98 in isolation. Instead, it applied the well-established principle that statutes are construed in the broader context of related laws, with the presumption that new enactments operate in harmony with existing procedural and contractual doctrines unless the Legislature clearly indicates otherwise. The Court noted that when the Legislature intends to override other laws, it typically uses “notwithstanding any other law” language, which Section 1281.98 does not contain. This opened the door to reading the statute alongside other provisions.

In interpreting Section 1281.98, the Court considered long-standing provisions that allow relief from forfeiture or default in appropriate circumstances, and harmonized Section 1281.98 with:

• CCP § 473(b) authorizes a court to relieve a party from default or other adverse consequences when the failure to act is due to mistake, inadvertence, surprise, or excusable neglect. This provision gives courts flexibility to excuse procedural missteps that were not willful or reckless.
• Civil Code § 3275 provides that a party who has substantially performed a contract, but has failed in some respect due to mistake or accident, may be relieved from forfeiture if they fully compensate the other party for any harm caused. This reflects California’s general policy against disproportionate penalties for minor or unintentional breaches.
• Civil Code § 1511 excuses performance when it has been prevented by impossibility or by the conduct of the other party, ensuring that contractual obligations are enforced fairly and in line with practical realities.

By reading Section 1281.98 alongside these statutes, the Court concluded that the 30-day payment deadline should not trigger automatic forfeiture in every instance. Instead, loss of the right to arbitrate is appropriate only where the nonpayment is willful, fraudulent, or grossly negligent. This interpretation preserves the deterrent purpose of the statute while avoiding harsh results in cases involving genuine errors or unforeseeable obstacles.

It is with this caveat – that the employer’s nonpayment must be willful, fraudulent, or grossly negligent to trigger Section 1281.98 – arrives at its conclusion that the FAA does not preempt Section 1281.98.  The California Supreme Court did not weigh in on whether any of the specific facts regarding Hohenshelt and remanded the matter for a determination whether the employer may be excused for its failure to pay the arbitration fees within the 30 days allotted by Section 1281.98.

Legislative Intent and FAA Considerations

The Court emphasized that Section 1281.98’s legislative history shows that it targeted willful nonpayment used to stall arbitration or obstruct the process. The Legislature’s concern was with deliberate nonpayment, not short, promptly corrected good-faith delays. This reading avoids conflict with the FAA by ensuring the statute does not operate as an inflexible penalty that undermines arbitration.

FAA Context and Concurrence
Because Hohenshelt arose under the CAA, the majority did not need to decide whether Section 1281.98 would apply if the arbitration were governed solely by the FAA. The Court noted its interpretation of Section 1281.98 was consistent with the FAA’s general pro-arbitration objectives. However, Justice Groban’s concurring opinion, joined by Justice Evans, cautioned that a different outcome might follow if the arbitration were governed exclusively by the FAA. If federal law controls exclusively, the FAA’s preemption principles could limit or displace California’s fee-payment penalty scheme, potentially removing FAA-governed employment agreements from the reach of Section 1281.98’s automatic breach and forfeiture provisions. This signals that employers using FAA-governed agreements should evaluate whether California’s fee-payment rules apply at all to their arbitrations.

Key Takeaways for Employers

• Deadlines Remain Critical
  The 30-day fee payment rule under Section 1281.98 still carries teeth. Arbitration rights can be forfeited if nonpayment is found to be willful, grossly negligent, or part of a recurring pattern. Employers should treat payment deadlines as immovable unless a mutually agreed extension is documented.
• Act Fast and Build Your Record
  If a payment is missed, cure it immediately and maintain contemporaneous documentation showing the cause, whether it was an administrative error, inadvertence, or another excusable factor. This evidence will be essential in seeking relief under procedural and contractual doctrines.
• Make the Other Party Whole
  Promptly reimburse any harm, costs, or delays caused by the late payment. Doing so supports a claim for equitable relief under CCP Section 473(b) or Civil Code Section 3275, and may help avoid a finding of material breach.
• Audit Your Governing Law Clause
  Review arbitration agreements to determine whether they are governed exclusively by the Federal Arbitration Act. FAA-only agreements may fall outside Section 1281.98’s penalty framework, although late payment could still trigger other contractual breach or waiver arguments.
• Assess the Stakes in Employment and Class Litigation
  In putative wage-and-hour class actions, forfeiting arbitration rights can push the dispute back into court, where litigation costs, procedural burdens, and potential settlement values are often significantly higher. The financial and strategic consequences of a missed deadline can be substantial.

The Hohenshelt ruling offers a somewhat narrow lifeline for employers who miss arbitration fee deadlines due to genuine, non-willful mistakes. However, this is not a license to stall payment of arbitration fees and costs. In high-stakes employment, wage-and-hour, and class action litigation, the cost of forfeiting arbitration can be enormous. Employers should proactively audit arbitration agreements, confirm governing law provisions, and implement airtight payment tracking protocols to ensure deadlines are met without exception.

[1] Code of Civil Procedure Section 1281.97 was not at issue in Hohenshelt but is a companion statute that requires payment of fees and costs necessary to initiate arbitration within 30 days of the due date stated on the provider’s invoice.  However, Section 1281.97 is stricter than 1281.98 in that it does not permit the parties to agree to modify the due date for the initiation fees.

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