Late Payments in California Arbitrations No Longer an Automatic Breach

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On August 11, 2025, the California Supreme Court issued its decision in Hohenshelt v. Superior Court[1] and peeled away the draconian application of California's arbitration fee statute, California Civil Procedure Code §§ 1281.97–1281.98. Enacted in 2019, Sections 1281.97-98 mandate that fees in consumer and employment arbitrations are due upon receipt of an invoice and set an immovable 30-day payment deadline. For unsuspecting businesses, any delay in the payment of those invoices, regardless of the circumstances, is a mandatory breach of the arbitration agreement. The rigid application of Sections 1281.97-98 put them at odds with the Federal Arbitration Act (FAA), which generally preempts state laws that disfavor or single out arbitration for special treatment. While the Hohenshelt court held that Sections 1281.97-98 and the FAA could coexist, it softened Sections 1281.97-98 and held they only activate if the business's failure to pay arbitration fees on time was willful, fraudulent, or grossly negligent.

The Issue

In October 2019, the California Legislature added Sections 1281.97-98 to the California Arbitration Act (CAA),[2] which significantly impacted employment and consumer arbitrations:

  1. Sections 1281.97-98 require arbitration providers to issue invoices that are due upon receipt, which immediately put the invoice recipient on the clock to complete payment, unless the arbitration agreement set forth a specific number of days for payment.
  2. Sections 1281.97-98 require the party that drafted the arbitration agreement (typically businesses) to pay invoices within 30 days of the due date. In most cases, this 30-day period commenced from the date the invoice was issued.
  3. Any late payment is considered an immediate material breach of the arbitration agreement, and the consumer or worker may either: withdraw from the arbitration and proceed in court or compel arbitration.
  4. If the consumer or worker proceeds in arbitration, the business must pay all attorneys' fees and costs of the non-drafting party until the end of arbitration.
  5. If the consumer or worker proceeds in court, the business must pay expenses, including attorneys' fees, related to the breach. The court may also award sanctions against the business, including striking of its pleadings, a finding of default, or a contempt sanction.

For the unsuspecting business, Sections 1281.97-98 made it more difficult to exercise its bargained-for right to arbitration. The only way to keep disputes in arbitration was to pay each invoice timely and in full, even those that may have been lost or delayed in transit.

The Landscape

Before Hohenshelt, there was no room for error. California courts generally agreed that any delay for any reason was a violation of Sections 1281.97-98. But courts diverged on whether Sections 1281.97-98 conflicted with the FAA, in which case the FAA might preempt the application of the law. The majority of California lower courts, including the lower court in Hohenshelt, held that Sections 1281.97-98 merely furthered efficient arbitrations and can be co-applied with the FAA.[3] Then, the federal courts in California departed, starting with Belyea v. GreenSky, Inc. The court in Belyea, relying on U.S. Supreme Court precedent, held that Sections 1281.97-98 violated the equal-treatment and equal-footing principles of the FAA because they make arbitration provisions unenforceable on arbitration-specific grounds.[4] The federal cases following Belyea mostly agreed with that reasoning. Then California courts started to follow federal trend.[5] This divide brought about Hohenshelt.

The Hohenshelt Decision

The Hohenshelt case involved an employer failure to pay two invoices related to the parties' final evidentiary hearing on time. The parties had already participated in the arbitration for approximately one year before the subject invoices. The employer paid the invoices shortly after receiving notice from the arbitration provider that they were unpaid. The lower court in Hohenshelt followed the reasoning of prior California courts and held that the employer's late payment was an immediate, material breach under Section 1281.98. The employer appealed.

The Hohenshelt court addressed two distinct issues: (1) whether Section 1281.98 (and Section 1281.97 by extension) was at odds with the FAA and (2), if so, whether the FAA preempted Section 1281.98. The Hohenshelt court focused primarily on the first issue. The Hohenshelt court departed from the reasoning of prior courts and held that an untimely arbitration payment is not a material breach under Section 1281.98 unless the late-paying party did so willfully, fraudulently, or with gross negligence. In essence, the Hohenshelt court softened the draconian application of Section 1281.98 and set forth that a business breaches an arbitration agreement or waives its right to arbitration only if the business willfully or fraudulently delays payment or is grossly negligent in its delay.

With this new application of Section 1281.98, the Hohenshelt court held it was no longer at odds with the FAA, and the FAA does not preempt it. The Hohenshelt court thus agreed with the lower court on the preemption issue and remanded the case for further proceedings on whether the employer willfully, fraudulently, or grossly negligently delayed payment.

The Hohenshelt court intentionally avoided addressing the application of Section 1281.98 if the parties expressly agreed that the CAA does not apply to their arbitration agreement or dispute. Justice Groban noted this in his concurrence (which Justice Evans joined). In his concurrence, Justice Groban posited the alternative—if the parties expressly agreed to apply the CAA, there is no question regarding FAA preemption.

The Hohenshelt court also had two dissenters: Justice Corrigan and Justice Jenkins. Penning the dissent, Justice Corrigan noted the long history of cases that interpreted Section 1281.98 to mandate a breach of the arbitration agreement in the event of any late payment, regardless of the circumstances. Because Section 1281.98 applies this mandatory and immediate finding of breach, Justice Corrigan opined that it could not coexist with the FAA. Even with the majority's alterations to the application of Section 1281.98, Justice Corrigan stated it remains preempted because it still treats arbitration agreements differently than other contracts.

Key Takeaways

  • It remains important to diligently pay arbitration invoices on time and in full. While the Hohenshelt decision relaxes the analysis for breach of an arbitration agreement and waiver, willful disregard or grossly negligent ignorance of payment obligations will still result in a violation under Sections 1281.97-98. The penalties under Sections 1281.97-98 still apply. Businesses are on the hook for attorneys' fees and costs related to any violations of Sections 1281.97-98. Businesses should take special care to timely pay initial arbitration fees, as courts are more likely to find waiver of arbitration if the business never participated in the first instance. It is helpful to reach out to arbitration providers before initiation on cases that have been filed to ensure the provider directs invoices to the right recipients.
  • Consumer or employment agreements should specify whether the FAA or CAA apply to disputes. The Hohenshelt court intentionally did not address cases in which the parties expressly agree that the FAA—not the CAA—apply to the dispute. As prior courts have held, parties may still contract around Sections 1281.97-98 by clearly indicating only the FAA governs the procedural aspects of their arbitration (as opposed to the substantive law applicable to the dispute).
  • Businesses should consider whether to include payment deadlines in their agreements. Sections 1281.97-98 provide that the parties can agree to payment deadlines in arbitration. This would prevent arbitration providers from issuing invoices that are due upon receipt by default. Businesses should carefully consider the duration of time to make payment, as failure to meet a contractual payment deadline may be stronger evidence of a breach of the arbitration agreement separate and apart from application of Sections 1281.97-98.
  • Businesses should communicate relevant contractual provisions to the arbitration provider early. To the extent there are contractual provisions that affect the business's payment obligations or deadlines under Sections 1281.97-98, it is imperative to make those known to the arbitration provider as early as possible. Courts have held that businesses waived their right to arbitration in cases where the arbitration provider merely enforced its own payment deadlines and terminated the arbitration.
  • FAA preemption of Sections 1281.97-98 remains a viable argument in federal court. The general position of federal courts since Belyea has been that the FAA preempts Sections 1281.97-98, as Justice Corrigan and Justice Jenkins argued in the Hohenshelt dissent. By its plain terms, the FAA makes arbitration agreements valid, irrevocable, and enforceable, and federal courts consistently hold that it preempts any rules that subject arbitration agreements to uncommon barriers—namely Sections 1281.97-98.[6] Because Sections 1281.97-98 sets forth penalties that apply solely to arbitration agreements and do not advance the purposes of arbitration, it puts them on unequal footing with all other agreements in California. As the Hohenshelt dissent sets forth, even the Hohenshelt opinion's watered-down version of Sections 1281.97-98 cannot coexist with the FAA. It remains to be seen whether a business or employer will choose to appeal this issue given the softening gloss the Hohenshelt attempted to apply to Sections 1281.97-98—likely to avoid further scrutiny.
 

[1] Hohenshelt v. Superior Ct. of Los Angeles Cnty., 2025 WL 2302229 (Cal. Aug. 11, 2025).

[2] Cal. Civ. Proc. Code §§ 1281.97-98.

[3] See, e.g., Gallo v. Wood Ranch USA, Inc., 81 Cal. App. 5th 621, 637(2022); Hohenshelt v. Superior Ct., 99 Cal. App. 5th 1319 (2024), rev'd sub nom. Hohenshelt v. Superior Ct. of Los Angeles Cnty., 2025 WL 2302229 (Cal. Aug. 11, 2025).

[4] Belyea v. GreenSky, Inc., 637 F. Supp. 3d 745 (N.D. Cal. 2022). The emerging trend among federal courts after Belyea was to hold that the FAA preempted Sections 1281.97-98.

[5] See, e.g., Hernandez v. Sohnen Enters., Inc., 102 Cal. App. 5th 222 (2024); Solis v. Sohnen Enters., Inc., 2024 WL 2345367 (Cal. Ct. App. May 23, 2024), reh'g denied (June 3, 2024), review granted (Aug. 21, 2024).

[6] Belyea, 637 F. Supp. 3d at 755 (quoting Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 649-50 (2022)).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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