In California, Late Payment Of Arbitration Fees May Be Excusable

Courts may excuse late arbitration payments, California’s highest court recently held in a victory for employers.

As a condition of his employment with Golden State Foods Corporation, sanitation worker Dana Hohenshelt signed an agreement requiring all employment-related claims to be resolved through arbitration governed by the Federal Arbitration Act (FAA).

In late 2019, Hohenshelt reported to his superiors that a sanitation lead was sexually harassing one of his coworkers. When management failed to take action, he reported the harassment up the chain.

Hohenshelt claimed that Golden State retaliated and terminated him in April 2020. He then sued Golden State, alleging discriminatory retaliation, failure to prevent harassment and retaliation and various Labor Code violations.

Golden State moved to compel arbitration and arbitration commenced through JAMS in April 2021. The arbitration proceeded for approximately one year. Upon setting the date for a final hearing, the arbitrator issued an invoice to Golden State for $32,300 on July 29, 2022, followed by an invoice for $11,760 on August 29.

On Sept. 30, JAMS sent a letter to both parties stating that it had yet to receive full payment of the fees.

In response, Hohenshelt filed a motion in superior court asserting that Golden State was in default of arbitration and the case should be returned to court because the employer violated section 1281.98.

Golden State paid the fees and objected to Hohenshelt’s motion. The employer argued that the invoices were issued after JAMS had informed the parties the arbitrator would be unavailable for several weeks and when counsel was preparing to go out on paternity leave.

Hohenshelt responded that section 1281.98 neither required nor permitted an inquiry into the reasons for a party’s nonpayment.

The trial court denied Hohenshelt’s motion, but the Court of Appeals reversed, ruling that section 1281.98 is not preempted by the FAA, and that the timely payment procedures in the statute are a friend of arbitration and not its foe.

In an opinion authored by Judge Goodwin H. Liu, the California Supreme Court reversed.

In 2019, the legislature adopted Senate Bill 707, which governs payment of fees during an ongoing arbitration. The statute was a response to “a concerning and troubling trend” in consumer and employment arbitrations, where employers were refusing to pay required fees, effectively stymieing the ability of employees to assert their legal rights.

The court considered decisions finding that section 1281.98 imposes an inflexible rule that deems any failure to make timely payment a material breach, regardless of circumstances, with the consequence that the drafting party loses its arbitral rights.

“But we do not think the language of section 1281.98 is by itself dispositive of the statute’s operation and effect,” the court noted, as the legislature “was concerned about cases where willful nonpayment of fees by a defendant stymies the ability of employees and consumers to have their claims resolved in arbitration pursuant to a pre-dispute arbitration agreement.”

The court found no suggestion that the legislature intended that any instance of nonpayment—regardless of the circumstances—would result in loss of the right to arbitration.

“[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 said. “It is ‘reasonable to infer that the Legislature intended no such anomaly, and that it intended, rather, a coherent and harmonious system of [contract] laws.’”

The court also found that section 1281.98 is not preempted by the FAA.

Although Golden State argued that section 1281.98 discriminated against arbitration agreements as compared to other contracts, the court pointed out that the statute provides a default rule that invoices are “due upon receipt” and must be “paid within 30 days,” but parties are free to contract for any due date they want by adopting their own provision in an arbitration agreement.

“[S]ection 1281.98, construed in harmony with background statutes, makes arbitration contracts enforceable on the same grounds as those that apply to other contracts: When a party breaches its contractual obligations willfully, fraudulently, or with gross negligence, it cannot escape the consequences by pointing to a lack of harm to the other party,” the court explained. “But short of such wrongful conduct, a breaching party may be relieved from forfeiting its right to enforce an arbitration agreement based on the circumstances, as provided by longstanding legal principles.”

To read the opinion in Hohenshelt v. Superior Court, click .

Why it matters: The California Supreme Court’s employer-friendly decision rejected a strict construction of section 1281.98 that imposed “an inflexible and sometimes harsh rule resulting in loss of arbitral rights,” instead concluding that companies and employers should not be stripped of their contractual right to arbitration where the nonpayment of fees results from a good faith mistake, inadvertence or other excusable neglect.