The GigReporter

The California Supreme Court recently decided an issue that the state’s intermediate appellate courts had been split on for years: Are California laws requiring timely payment of arbitration fees, and allowing the other party to cancel the arbitration and return the dispute to court if payment is not tendered, preempted by the Federal Arbitration Act (FAA)? The state’s high court found that the rule was not preempted, and when properly interpreted applies only to deliberate or grossly negligent nonpayment, not ordinary mistakes.

California Code of Civil Procedure Section 1281.98 states that in arbitrations where a drafting party is required to pay fees or costs during the pendency of a proceeding, and that party does not pay within thirty days of the due date, that party has breached the arbitration agreement, defaulted on the arbitration and has waived the right to compel arbitration.[1] This law was enacted in 2019, because the legislature perceived there was a rash of instances where parties were strategically avoiding payment to freeze arbitration proceedings in place indefinitely. The FAA (9 U.S.C. § 1 et seq.) preempts most state laws that are unfavorable to arbitration agreements. The courts that have examined the question of whether Section 1281.98 is preempted have split on the foundational issue: Does this law disfavor arbitration, because it allows a party to cancel it under certain circumstances? Or does it favor arbitration, because it incentivizes parties to make timely payments and continue the process?

In Hohenshelt v. Superior Ct. of L.A. Cnty., No. S284498, 2025 BL 281545 (Cal. Aug. 11, 2025), the California Supreme Court noted that, properly interpreted, the law was not preempted. The court’s opinion took note of objections, raised in some lower court dissenting opinions, that traditional contract law does not allow one party to completely void a contract for minor, unintentional breaches by the other party, and that the statute thus impermissibly disfavored arbitration contracts. While stating that a strict interpretation was not unreasonable given the statutory language, in order to harmonize this rule with the FAA and these underlying contract law principles the court interpreted Section 1281.98 so that it only allows a party to cancel the arbitration where the opponent’s non-payment is “willful, fraudulent, or grossly negligent”. The court then determined that, as interpreted, the statute was not preempted by the FAA. While the employer-appellant in this case did not prevail on the preemption issue, the matter was returned to the trial court for determination of whether its nonpayment was inadvertent.

SCI would never recommend that any client of ours involved in an arbitration engage in strategic nonpayment of arbitration fees regardless of the outcome here; such tactics are unethical and harmful to your business reputation and credit score. Now, they will also be ineffective. The Hohenshelt opinion also affirmed the statutory right of the parties to extend any due date for payment by mutual agreement and even approved of extensions made in the thirty-date period after the due date has passed. We would recommend that any client having difficulties with an arbitration payment try to negotiate an extension with their adversary; if nothing else, it will establish a record of your good faith attempt to comply with the statute and the contractual payment terms, as evidence that any nonpayment was inadvertent and not willful, fraudulent, or grossly negligent.

[1] The preceding Section 1281.97 contains substantially similar rules for payments required before the arbitration proceedings begin.