Deterring Strategic Nonpayment Without Automatic Forfeiture: California Supreme Court Upholds CCP § 1281.98 Against FAA Preemption by Incorporating Relief-from-Forfeiture Doctrines

Deterring Strategic Nonpayment Without Automatic Forfeiture: California Supreme Court Upholds CCP § 1281.98 Against FAA Preemption by Incorporating Relief-from-Forfeiture Doctrines

Introduction

In Hohenshelt v. Superior Court (Aug. 11, 2025), the California Supreme Court resolved a high-stakes conflict at the intersection of state arbitration administration and federal arbitration policy. The question was whether the Federal Arbitration Act (FAA) preempts Code of Civil Procedure section 1281.98—a California Arbitration Act (CAA) provision governing payment of ongoing arbitrator fees in employment and consumer arbitrations. Section 1281.98 sets a default “due upon receipt” billing rule and a 30-day grace period; if the drafting party fails to pay within that period, it is deemed in “material breach,” in “default,” and to have “waived” its right to compel the claimant to proceed in that arbitration. The claimant may then withdraw to court or continue in arbitration if the provider will proceed.

The Court (Liu, J., joined by Guerrero, C.J., and Kruger, Groban, and Evans, JJ.) held that section 1281.98 is not preempted—when properly construed. Rejecting a string of Court of Appeal decisions that applied the statute as a strict, no-excuses forfeiture mechanism, the Court harmonized section 1281.98 with longstanding California statutes and common-law doctrines that excuse nonperformance and prevent unjust forfeitures where the breach is not willful, grossly negligent, or fraudulent. The case was remanded for the trial court to decide whether the employer’s late payment was excusable and, regardless, what compensable harm the employee incurred because of the delay.

A concurrence by Justice Groban (joined by Justice Evans) emphasized an analytically prior, frequently dispositive question: whether the parties agreed that CAA procedures would govern. If so, under Volt, applying the CAA per the parties’ agreement poses no FAA preemption issue. A dissent by Justice Corrigan (joined by Justice Jenkins) would have found preemption, reasoning that section 1281.98 still singles out arbitration by effectively making “time of the essence” and mandating material breach/waiver in ways foreign to general contract law.

Summary of the Opinion

  • The Court holds CCP § 1281.98 is not preempted by the FAA’s equal-treatment principle, so long as it is construed in harmony with background California doctrines (Civil Code §§ 3275, 1511; CCP § 473(b)) that:
    • Excuse forfeiture and default for non-willful, non-grossly-negligent, non-fraudulent late payment, upon full compensation to the other party; and
    • Permit discretionary relief from orders/proceedings taken against a party due to mistake, inadvertence, surprise, or excusable neglect.
  • Section 1281.98 remains a strong deterrent to strategic nonpayment: willful, grossly negligent, or fraudulent nonpayment that delays arbitration triggers material breach and loss of the drafting party’s right to compel arbitration of that dispute.
  • The statute is a default rule: parties can set their own invoice due dates in the arbitration agreement and can later mutually agree to extensions. The “due upon receipt” and 30-day grace period apply absent such provisions.
  • Even if forfeiture is excused, the drafting party must make the claimant whole for reasonable expenses caused by the delay (CCP § 1281.99(a)).
  • FAA preemption is avoided because the refined construction applies generally applicable contract principles, does not undermine fundamental attributes of arbitration, and promotes timely arbitration—consistent with the FAA’s purposes.
  • Disposition: The Court reverses the Court of Appeal’s directive to lift the stay and remands to determine (1) whether the late payment is excusable under the background doctrines and (2) any compensable harm. The Court disapproves a series of Court of Appeal decisions to the extent inconsistent with its interpretation.

Detailed Analysis

1) Precedents and Authorities Driving the Decision

  • FAA Equal-Treatment and Attributes of Arbitration:
    • Viking River Cruises, Inc. v. Moriana (2022) and AT&T Mobility LLC v. Concepcion (2011): State rules cannot disfavor arbitration or interfere with its fundamental attributes; arbitration must be enforced “according to its terms.”
    • Morgan v. Sundance, Inc. (2022): No arbitration-specific prejudice requirement; arbitration must be treated like other contracts.
    • Volt Information Sciences v. Stanford (1989): When parties agree to state procedural rules, applying those rules furthers the FAA’s core purpose.
    • Smith v. Spizzirri (2024): FAA § 3 contemplates a continuing judicial role and a “return ticket” to court if arbitration breaks down or a party is in default.
  • Legislative Target of Strategic Nonpayment:
    • Brown v. Dillard’s, Inc. (9th Cir. 2005) and Sink v. Aden Enterprises, Inc. (9th Cir. 2003): Willful refusal to pay arbitration fees is a material breach/default that should not trap claimants in “procedural limbo.” California’s Legislature expressly sought to “affirm” these decisions when enacting SB 707, the source of § 1281.98.
  • California Relief-from-Forfeiture and Excuse Doctrines:
    • Civil Code § 3275: Courts may relieve a party from contractual forfeiture for non-willful, non-grossly-negligent, non-fraudulent breaches upon full compensation to the other side.
    • Civil Code § 1511: Excuses nonperformance when prevented by law or superhuman cause; recognizes impossibility/impracticability frameworks.
    • CCP § 473(b): Discretionary relief from orders/proceedings taken against a party due to mistake, inadvertence, surprise, or excusable neglect.
  • Contract Law on Performance and Good Faith:
    • Perry v. Quackenbush and Connell v. Higgins: Substantial performance requires good faith; willful departures are not excused.
    • Magic Carpet Ride LLC v. Rugger Investment Group, L.L.C. (2019): Relief-from-forfeiture factors and absence of willfulness support equitable relief.
  • Appellate Landscape:
    • Multiple Court of Appeal decisions had treated § 1281.98 (and § 1281.97) as strict, no-excuse forfeiture rules. The Supreme Court disapproved those to the extent inconsistent with its harmonized construction.

2) The Court’s Legal Reasoning

  • Harmonizing § 1281.98 with Background Law:
    • Although § 1281.98 states that late payment results in material breach/default/waiver and authorizes the claimant to exit arbitration, the Court reads the statute in the full “system of law” in which it sits.
    • The Legislature did not use “notwithstanding any other law” language; absent a clear statement, longstanding relief-from-forfeiture rules continue to apply.
    • Thus, the loss of arbitral rights is not “automatic” for every late payment. Relief is available where the nonpayment is not willful, grossly negligent, or fraudulent and the claimant is fully compensated for any resulting harm.
  • Legislative Purpose Controls the Contours:
    • SB 707 targeted bad-faith tactics—“strategic nonpayment” that stalled or obstructed individual arbitrations after employers compelled arbitration and barred class proceedings.
    • Nothing suggests an intent to penalize excusable, non-prejudicial errors or to strip courts of longstanding equitable authority to prevent unjust forfeitures.
  • FAA Equal-Treatment Principle Is Satisfied:
    • As construed, § 1281.98 does not impose arbitration-specific hurdles. It aligns with general contract defenses: willful, grossly negligent, or fraudulent breaches have consequences; excusable neglect may warrant relief upon compensation.
    • The statute is a default rule that parties can contract around by setting their own invoice timeframes and agreeing to extensions. This preserves party autonomy—a fundamental attribute of arbitration.
  • No Interference with Arbitration’s “Fundamental Attributes”:
    • Unlike class procedures (Concepcion), fee-timeliness rules do not inject procedural morass; they streamline and accelerate proceedings by ensuring funding.
    • The FAA contemplates continuing court involvement; § 1281.98’s “return-to-court” option mirrors FAA § 3’s stay-and-return framework (Smith v. Spizzirri).
  • Remand Standard:
    • The trial court must determine whether Golden State’s late payment resulted from excusable mistake, inadvertence, surprise, or excusable neglect (CCP § 473(b)), or whether relief-from-forfeiture is warranted under Civil Code § 3275 or excuse under § 1511.
    • Even if forfeiture is excused, the court must award reasonable expenses caused by the delay under § 1281.99(a) to make the claimant whole.

3) The Concurring and Dissenting Opinions

  • Groban, J., concurring (Evans, J., conc.):
    • Highlights a threshold contract-interpretation question: did the parties agree that CAA procedures apply? In California courts, CAA procedures apply by default unless the agreement expressly provides otherwise. If the CAA governs by agreement, Volt indicates there is no FAA preemption issue to resolve.
    • Future cases should ask this question first; many preemption disputes may be avoided entirely if the CAA applies by agreement or by default.
  • Corrigan, J., dissenting (Jenkins, J., conc.):
    • Would find § 1281.98 preempted. Even with the majority’s gloss, the statute singles out arbitration by making “time of the essence” and by mandating material breach/waiver on late payment in ways inapplicable to other contracts.
    • Argues the legislative record shows no intent to carve out excusable-delay exceptions, and that equitable defenses extend further than the majority allows, including relief for some willful breaches absent prejudice (citing MacFadden and Peterson).

4) Practical Impact

  • Bright-line forfeiture is out; excuse-and-compensation is in:
    • Trial courts must now undertake a fact-specific inquiry when late payment is shown, rather than automatically lifting stays and sending parties back to court.
    • Even if arbitration continues, claimants can recover reasonable expenses caused by the delay under § 1281.99(a).
  • Several Court of Appeal decisions are disapproved:
    • The Supreme Court expressly disapproved prior decisions (e.g., Gallo, Espinoza, Williams, Doe, Suarez, Hernandez, Keeton, Trujillo, Colon-Perez, Sanders) to the extent they adopted rigid, no-excuse readings.
  • Contract drafting and administration:
    • Employers and businesses should:
      • Specify payment timelines in the arbitration agreement to replace the “due upon receipt/30 days” default.
      • Include a process for extensions (e.g., written agreement via email) that complies with § 1281.98’s requirement that “all parties” agree.
      • Establish internal controls: designate invoice recipients, set automated reminders, and maintain backup payment personnel to avoid inadvertent delay.
    • Claimants’ counsel should:
      • Document invoice dates, due dates, reminders, and any effects of delay (e.g., rescheduled hearings, additional attorney time, lost wages or other concrete harms) to support § 1281.99(a) compensation.
      • Be prepared to address whether any extension was mutually agreed and whether any provider “new due date” was valid under § 1281.98(a)(2).
  • Litigation posture:
    • On a motion to lift stay: the moving claimant can show late payment and absence of a mutually agreed extension, triggering § 1281.98’s consequences.
    • The drafting party then bears the burden to seek relief (CCP § 473(b); Civ. Code §§ 3275, 1511), supported by sworn facts establishing good faith, excusable neglect, or impossibility, and offering full compensation.
    • Court must make case-specific findings; willful or grossly negligent nonpayment will forfeit arbitral rights for that dispute.
  • Arbitration providers:
    • Providers should continue issuing “due upon receipt” invoices unless the parties’ agreement sets different timelines; any extension must reflect agreement “by all parties.”
    • Provider communications about invoice timing and arbitrator availability may be relevant to excusable neglect/impossibility analyses.
  • Preemption litigation going forward:
    • As construed, § 1281.98 closely tracks generally applicable contract defenses. This posture substantially reduces FAA preemption exposure under Concepcion, Morgan, and Kindred.
    • Per the concurrence, many disputes may be resolved by contract interpretation: if the parties incorporated the CAA’s procedures (expressly or by default in California courts), preemption analysis may be unnecessary.

Complex Concepts Simplified

  • Equal-treatment principle (FAA § 2): Arbitration agreements must be treated like other contracts. States can apply general contract defenses (fraud, unconscionability, excusable neglect) but cannot create arbitration-only penalties.
  • Material breach, default, and waiver under § 1281.98: A late-paying drafting party is deemed in breach/default/waiver, enabling the claimant to exit arbitration. But under California’s relief doctrines, courts may excuse forfeiture for non-willful, excusable delays if the claimant is fully compensated.
  • Relief-from-forfeiture and excusable neglect:
    • Civ. Code § 3275: Prevents harsh forfeiture for non-willful breaches upon full compensation.
    • Civ. Code § 1511: Excuses performance prevented by law or superhuman causes.
    • CCP § 473(b): Allows relief from adverse orders due to mistake/inadvertence/surprise/excusable neglect.
  • “Due upon receipt” and the 30-day grace period: These are default rules. Parties can pre-negotiate different payment timelines in their arbitration agreement and can mutually agree to extensions even after invoices issue.
  • “Time is of the essence” concern: The dissent views § 1281.98 as making time of the essence in a way that singles out arbitration. The majority replies that the statute is a default, parties retain flexibility, and relief doctrines temper forfeiture, aligning with general contract principles.

Unresolved or Open Questions

  • Applicability of CAA when agreements reference FAA/provider rules: The Court declined to decide whether the parties here opted out of the CAA, deeming the argument forfeited. Practitioners should brief this threshold issue early.
  • Scope relative to § 1281.97 (initial fees): The opinion analyzes § 1281.98 (ongoing fees). Its harmonizing logic likely informs reading of § 1281.97, but the Court did not expressly decide that question.
  • Delegation clauses: Several Courts of Appeal have held courts—not arbitrators—decide § 1281.98 defaults even with delegation clauses. The Supreme Court did not resolve this in Hohenshelt.
  • What qualifies as “gross negligence” versus “excusable neglect”: The decision points to familiar standards but leaves line-drawing to trial courts based on facts, including timeliness of cure, diligence, and prejudice.
  • Compensable harm under § 1281.99(a): The Court directs trial courts to assess “reasonable expenses” caused by delay. The measure of recoverable items (e.g., extra attorney time, rescheduling costs, measurable consequential losses) will develop in practice.

Practice Pointers

  • For drafters:
    • Set explicit invoice due dates (e.g., 15, 30, or 45 days) in the agreement to replace the default “due upon receipt.”
    • Define a streamlined method for agreeing to extensions (e.g., email confirmations; clear sign-off authority) that complies with § 1281.98’s “all parties” requirement.
    • State that any provider “unavailability” communications do not alter invoice due dates absent mutual agreement.
  • For respondents (drafting parties):
    • Build compliance systems: multiple recipients for provider invoices, calendar flags, backup approvers, and emergency payment protocols.
    • If late payment occurs, act immediately: pay, explain the cause via declaration, request relief (CCP § 473(b)/Civ. Code § 3275), and offer to fully compensate claimant’s reasonable expenses.
  • For claimants:
    • Maintain a clean record: preserve provider invoices, transmission dates, reminders, and any express or implied extension communications.
    • Itemize and substantiate reasonable expenses caused by delay for § 1281.99(a) recovery, even if the case continues in arbitration.
  • For arbitrators/providers:
    • Issue invoices promptly with clear “due upon receipt” language unless parties’ agreement provides otherwise.
    • Document any extension requests and confirm extensions only upon “all parties’” agreement to ensure compliance with § 1281.98(a)(2).

Conclusion

Hohenshelt recalibrates California’s arbitration-fee default statute to squarely fit within the FAA’s equal-treatment principle. The Court preserved the Legislature’s core objective—deterring strategic nonpayment that stalls arbitrations—while rejecting a rigid, no-excuses forfeiture rule. By integrating traditional relief-from-forfeiture doctrines, the Court ensures that willful, grossly negligent, or fraudulent nonpayment will cost the drafter its arbitral rights, but excusable, good-faith mistakes need not derail arbitration so long as the claimant is made whole for delay-based expenses.

The decision also clarifies that parties retain autonomy to set their own invoice timelines and to agree to extensions, that courts will play a supervisory role consistent with the FAA, and that a run of Court of Appeal “bright-line” cases applying § 1281.98 has been disapproved. Going forward, the battleground shifts from automatic forfeiture to careful, fact-driven application of California’s familiar equitable and statutory relief mechanisms—preserving both the speed of arbitration and the fairness of contract law.

Case Details

Year: 2025
Court: Supreme Court of California

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