The California Supreme Court's decision in Hohenshelt v. Superior Court may seem unfavorable to employers initially. After all, the Court refused to find Code of Civil Procedure section 1281.98 — California's "pay arbitration fees on time or lose arbitration" rule— preempted by the Federal Arbitration Act (FAA). However, a closer reading reveals a significant silver lining: the Court has softened the harsh interpretations that had been coming out of the Courts of Appeal.
Challenges for Employers Before Hohenshelt
When Section 1281.98 of the California Code of Civil Procedure was enacted, several appellate courts interpreted it as an inflexible deadline: if an employer (as the drafting party) missed payment of arbitration fees by even a day — regardless of the reason — it automatically forfeited its right to arbitrate, and the employee could march straight back to court. No inquiry into intent. No consideration of good faith mistakes. No exceptions for emergencies.
That "strict liability" approach created high-stakes procedural traps. A misplaced invoice, a clerical oversight, or even a natural disaster could wipe out an employer's arbitration rights and open the door to a return to litigation in court.
What the Supreme Court Changed
In Hohenshelt, the Supreme Court rejected that rigid reading, potentially to avoid FAA preemption. It held that Section 1281.98 must be read in harmony with longstanding California contract law principles — specifically Civil Code Section 3275 (relief from forfeiture for non-willful breaches), Civil Code Section 1511 (excusing performance delayed by impossibility or causes beyond control), and Code of Civil Procedure Section 473(b) (relief for mistake, inadvertence, surprise, or excusable neglect).
The upshot: if an employer's late payment is due to a good-faith mistake, inadvertence, or other excusable neglect — not willful, fraudulent, or grossly negligent conduct — the employer can preserve its arbitration rights. The decision thus seeks to align Section 1281.98 with general contract principles, avoiding the "special rules" problem that raised FAA preemption concerns.
Why This Is Good News for Employers
- No More Automatic Death Penalty for Innocent Errors — The Court made clear that Section 1281.98 is not meant to punish employers for honest mistakes. Relief from forfeiture is available where payment delays are excusable or inadvertent.
- Clearer Standard for Compliance — Employers now know the focus will be on the reason for any late payment. Strategic or willful nonpayment remains fatal, but inadvertent slip-ups do not mean losing arbitration.
- Preserves Arbitration as a Viable Option — By rejecting the hyper-strict interpretations, the Court kept arbitration agreements from becoming brittle, one-strike contracts. Employers can continue to use arbitration with more confidence that the process will not implode over a minor administrative mishap.
- Encourages Best Practices Without Creating Unreasonable Risk — The decision still incentivizes timely payment—employers must have solid procedures to avoid delays — but it removes the disproportionate penalty.
Bottom Line
While the Court didn't strike down Section 1281.98, it seems to have defanged its most draconian interpretations. The ruling highlights what the Court deemed to be the Legislature's intent to deter bad-faith stalling while protecting employers from catastrophic consequences for good-faith errors. For California employers committed to arbitration, Hohenshelt is a practical win.
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