Is this arbitration clause enforceable in a California court, and what can defeat it that would not defeat it elsewhere?
The clause itself is valid: a written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract (Code Civ. Proc. § 1281). But a California court hearing a petition to compel may refuse to enforce it where a party to the arbitration agreement is also a party to a pending court action or special proceeding with a THIRD PARTY arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact: in which case the court may refuse to enforce the agreement, order joinder, compel arbitration and stay the action, or stay the arbitration (§ 1281.2(c) and its concluding paragraph). In an employment or consumer arbitration, if the fees or costs required to continue the proceeding are not paid within 30 days after the due date, the drafting party is in material breach and in default and waives its right to compel the employee or consumer to arbitrate (§ 1281.98(a)(1)), but the California Supreme Court has rejected the rigid reading of that section: it does not abrogate the principle that one party's nonperformance extinguishes the other's contractual duties only when the nonperformance is willful, grossly negligent or fraudulent, and a drafting party can avoid forfeiture by showing the delay was excusable under Code Civ. Proc. § 473, Civil Code § 3275 or Civil Code § 1511 (Hohenshelt). Where an employer imposes arbitration of unwaivable statutory claims as a condition of employment, the arbitration must meet certain minimum requirements, including a neutral arbitrator, adequate discovery, a written decision permitting limited judicial review, and limits on costs, and cannot generally require the employee to bear any type of expense the employee would not bear in court (Armendariz). On the drafting party's default the employee or consumer "may unilaterally elect" to withdraw to court with the limitations period tolled from the first filing, to continue the arbitration if the provider agrees, to petition the court to compel payment, or to pay the fees and recover them in the award "without regard to any findings on the merits" (§ 1281.98(b)); on withdrawal to court the employee or consumer may move, or sue separately, to recover all attorney's fees and all costs associated with the abandoned arbitration proceeding, without regard to any findings on the merits, and the court "shall impose sanctions on the drafting party in accordance with Section 1281.99" (§ 1281.98(c)); where the employee or consumer instead continues in arbitration, the ARBITRATOR shall impose appropriate sanctions, including monetary, issue, evidence or terminating sanctions (§ 1281.98(d)); and § 1281.99 makes a monetary sanction mandatory and evidence, terminating and contempt sanctions available unless the drafting party acted with substantial justification. Section 1281.2 also names waiver of the right to compel and grounds for rescission as reasons to deny a petition (§ 1281.2(a)-(b)). The same default exists one stage earlier: where the fees or costs to INITIATE an employment or consumer arbitration are not paid within 30 days after the due date, the drafting party is in material breach, is in default of the arbitration, and waives its right to compel arbitration under § 1281.2, and the employee or consumer may either withdraw the claim and proceed in court or compel arbitration in which the drafting party pays reasonable attorney's fees and costs related to the arbitration (§ 1281.97(a)-(b)).
The trap
Section 1281.2(c) lets a California court refuse or stay enforcement of an otherwise valid clause where a party to the agreement is also a party to pending third-party litigation arising out of the same transaction or series of related transactions AND there is a possibility of conflicting rulings on a common issue of law or fact. Both conditions are in the subdivision. The second trap is § 1281.98's calendar: 30 days after the due date, and invoices are due on receipt absent an express provision in the agreement (§ 1281.98(a)(2)). Before August 2025 Courts of Appeal read that section to forfeit the right to arbitrate automatically; Hohenshelt v. Superior Court rejected that 'inflexible and sometimes harsh rule', so a drafting party that paid late by good-faith mistake, inadvertence or excusable neglect may keep arbitration (with compensation to the other side under Civil Code § 3275), while a willful, grossly negligent or fraudulent nonpayment still forfeits it. Hohenshelt remanded for that showing; it did not decide what evidence suffices. The third trap runs the other way, in favour of § 1281.2(c): a clause that calls for the Federal Arbitration Act only 'if it would be applicable' does not displace the subdivision, because the subdivision does not conflict with the applicable provisions of the FAA and does not undermine or frustrate the FAA's substantive policy favoring arbitration (Cronus). What takes § 1281.2(c) off the table is an express designation "that any arbitration proceeding should move forward under the FAA's procedural provisions rather than under state procedural law", which Cronus holds the parties are free to make; the conditional recital in Cronus itself was not read as one.
17 authorities
- statuteCal. Civ. Proc. Code § 1281enactment date not established
The words that state the rule
A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.
- statuteCal. Civ. Proc. Code § 1281.2enactment date not established
The words that state the rule
On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: (a) The right to compel arbitration has been waived by the petitioner; or (b) Grounds exist for rescission of the agreement. (c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. This subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295. (d) The petitioner is a state or federally chartered depository institution that, on or after January 1, 2018, is seeking to apply a written agreement to arbitrate, contained in a contract consented to by a respondent consumer, to a purported contractual relationship with that respondent consumer that was created by the petitioner fraudulently without the respondent consumer’s consent and by unlawfully using the respondent consumer’s personal identifying information, as defined in Section 1798.92 of the Civil Code. If the court determines that a written agreement to arbitrate a controversy exists, an order to arbitrate that controversy may not be refused on the ground that the petitioner’s contentions lack substantive merit. If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies.
- statuteCal. Civ. Proc. Code § 1281.2enactment date not established
The words that state the rule
If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c), the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.
- statuteCal. Civ. Proc. Code § 1281.98enactment date not established
The words that state the rule
(a) (1) In an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration provider, that the drafting party pay certain fees and costs during the pendency of an arbitration proceeding, if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel the employee or consumer to proceed with that arbitration as a result of the material breach. (2) The arbitration provider shall provide an invoice for any fees and costs required for the arbitration proceeding to continue to all of the parties to the arbitration. The invoice shall be provided in its entirety, shall state the full amount owed and the date that payment is due, and shall be sent to all parties by the same means on the same day. To avoid delay, absent an express provision in the arbitration agreement stating the number of days in which the parties to the arbitration must pay any required fees or costs, the arbitration provider shall issue all invoices to the parties as due upon receipt. Any extension of time for the due date shall be agreed upon by all parties. Once the invoice has been paid, the arbitration provider shall provide to all parties a document that reflects the date on which the invoice was paid.
- caseNo. S284498 (Cal. Aug. 11, 2025)Hohenshelt v. Superior CourtCal.decided 2025
The words that state the rule
We hold that section 1281.98, properly construed, is not preempted by the FAA. Although section 1281.98 has been 1 HOHENSHELT v. SUPERIOR COURT Opinion of the Court by Liu, J. interpreted by various Courts of Appeal to impose an inflexible and sometimes harsh rule resulting in loss of arbitral rights, we reject that rigid construction and instead conclude that the statute does not abrogate the longstanding principle, established by statute and common law, that one party’s nonperformance of an obligation automatically extinguishes the other party’s contractual duties only when nonperformance is willful, grossly negligent, or fraudulent. As explained below, the Legislature sought to deter companies and employers from engaging in strategic nonpayment of arbitration fees; we 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.
- caseNo. S284498 (Cal. Aug. 11, 2025)Hohenshelt v. Superior CourtCal.decided 2025
The words that state the rule
We agree that if section 1281.98 were construed to mean that any failure to make timely payment, regardless of the circumstances, invariably results in forfeiture of arbitral rights, the statute would be anomalous in the context of general contract law principles. As we have explained, however, a drafting party can avoid forfeiture of its right to arbitration by showing that the delay was excusable under section 473, Civil Code section 3275, or Civil Code section 1511, the background principles that generally apply to other contractual obligations.
- case24 Cal. 4th 83Armendariz v. Foundation Health Psychcare Services, Inc.Cal.decided 2000read it at the source ↗
The words that state the rule
We conclude that such claims are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights. As explained, in order for such vindication to occur, the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration.
- case24 Cal. 4th 83Armendariz v. Foundation Health Psychcare Services, Inc.Cal.decided 2000read it at the source ↗
The words that state the rule
Accordingly, consistent with the majority of jurisdictions to consider this issue, we conclude that when an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.
- statuteCal. Civ. Proc. Code § 1281.98enactment date not established
The words that state the rule
(b) If the drafting party materially breaches the arbitration agreement and is in default under subdivision (a), the employee or consumer may unilaterally elect to do any of the following: (1) Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction. If the employee or consumer withdraws the claim from arbitration and proceeds with an action in a court of appropriate jurisdiction, the statute of limitations with regard to all claims brought or that relate back to any claim brought in arbitration shall be tolled as of the date of the first filing of a claim in any court, arbitration forum, or other dispute resolution forum. (2) Continue the arbitration proceeding, if the arbitration provider agrees to continue administering the proceeding, notwithstanding the drafting party’s failure to pay fees or costs. The neutral arbitrator or arbitration provider may institute a collection action at the conclusion of the arbitration proceeding against the drafting party that is in default of the arbitration for payment of all fees associated with the employment or consumer arbitration proceeding, including the cost of administering any proceedings after the default. (3) Petition the court for an order compelling the drafting party to pay all arbitration fees that the drafting party is obligated to pay under the arbitration agreement or the rules of the arbitration provider. (4) Pay the drafting party’s fees and proceed with the arbitration proceeding. As part of the award, the employee or consumer shall recover all arbitration fees paid on behalf of the drafting party without regard to any findings on the merits in the underlying arbitration.
- statuteCal. Civ. Proc. Code § 1281.99enactment date not established
The words that state the rule
(a) The court shall impose a monetary sanction against a drafting party that materially breaches an arbitration agreement pursuant to subdivision (a) of Section 1281.97 or subdivision (a) of Section 1281.98, by ordering the drafting party to pay the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach. (b) In addition to the monetary sanction described in subdivision (a), the court may order any of the following sanctions against a drafting party that materially breaches an arbitration agreement pursuant to subdivision (a) of Section 1281.97 or subdivision (a) of Section 1281.98, unless the court finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust. (1) An evidence sanction by an order prohibiting the drafting party from conducting discovery in the civil action. (2) A terminating sanction by one of the following orders: (A) An order striking out the pleadings or parts of the pleadings of the drafting party. (B) An order rendering a judgment by default against the drafting party. (3) A contempt sanction by an order treating the drafting party as in contempt of court.
- statuteCal. Civ. Proc. Code § 1281.98enactment date not established
The words that state the rule
(c) If the employee or consumer withdraws the claim from arbitration and proceeds in a court of appropriate jurisdiction pursuant to paragraph (1) of subdivision (b), both of the following apply: (1) The employee or consumer may bring a motion, or a separate action, to recover all attorney’s fees and all costs associated with the abandoned arbitration proceeding. The recovery of arbitration fees, interest, and related attorney’s fees shall be without regard to any findings on the merits in the underlying action or arbitration. (2) The court shall impose sanctions on the drafting party in accordance with Section 1281.99. (d) If the employee or consumer continues in arbitration pursuant to paragraphs (2) through (4) of subdivision (b), inclusive, the arbitrator shall impose appropriate sanctions on the drafting party, including monetary sanctions, issue sanctions, evidence sanctions, or terminating sanctions.
- case24 Cal. 4th 83Armendariz v. Foundation Health Psychcare Services, Inc.Cal.decided 2000read it at the source ↗
The words that state the rule
We conclude, for reasons explained below, that the arbitration agreement is unenforceable and that therefore the Court of Appeal's judgment must be reversed.
- statuteCal. Civ. Code § 3275enactment date not established
The words that state the rule
Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.
- caseNo. S284498 (Cal. Aug. 11, 2025)Hohenshelt v. Superior CourtCal.decided 2025
The words that state the rule
We agree with the Court of Appeal that section 1281.98 is not preempted by the FAA. But in light of our clarification that section 1281.98 does not displace background statutes permitting relief to a breaching party in certain circumstances, we reverse the Court of Appeal’s order “direct[ing] the trial court to vacate its order denying the motion to lift the stay of litigation and to enter an order lifting the stay.” (Hohenshelt, supra, 99 Cal.App.5th at p. 1326.) We direct the Court of Appeal to remand the matter to the trial court for consideration of whether Golden State may be excused for its failure to timely pay arbitration fees, such that the stay of litigation should not be lifted and the parties should be returned to arbitration, and whether the delay resulted in compensable harm to Hohenshelt.
- statuteCal. Civ. Proc. Code § 1281.97enactment date not established
The words that state the rule
(a) (1) In an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration provider, the drafting party to pay certain fees and costs before the arbitration can proceed, if the fees or costs to initiate an arbitration proceeding are not paid within 30 days after the due date the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration under Section 1281.2. (2) After an employee or consumer meets the filing requirements necessary to initiate an arbitration, the arbitration provider shall immediately provide an invoice for any fees and costs required before the arbitration can proceed to all of the parties to the arbitration. The invoice shall be provided in its entirety, shall state the full amount owed and the date that payment is due, and shall be sent to all parties by the same means on the same day. To avoid delay, absent an express provision in the arbitration agreement stating the number of days in which the parties to the arbitration must pay any required fees or costs, the arbitration provider shall issue all invoices to the parties as due upon receipt. (b) If the drafting party materially breaches the arbitration agreement and is in default under subdivision (a), the employee or consumer may do either of the following: (1) Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction. (2) Compel arbitration in which the drafting party shall pay reasonable attorney’s fees and costs related to the arbitration.
- case35 Cal. 4th 376Cronus Investments, Inc. v. Concierge ServicesCal.decided 2005read it at the source ↗
The words that state the rule
Our opinion does not preclude parties to an arbitration agreement to expressly designate that any arbitration proceeding should move forward under the FAA’s procedural provisions rather than under state procedural law. We simply hold that the language of the arbitration clause in this case, calling for the application of the FAA “if it would be applicable,” should not be read to preclude the application of 1281.2(c), because it does not conflict with the applicable provisions of the FAA and does not undermine or frustrate the FAA’s substantive policy favoring arbitration.
- caseNo. A173832 (Cal. Ct. App. July 14, 2026)Wilkins v. Cruise, LLCCal. Ct. App.decided 2026
The words that state the rule
Here, the trial court provided no explanation for its conclusion that the instant case is one of those “peculiar situations” (Cronus Investments, supra, 35 Cal.4th at p. 393) addressed by the “third-party exception” set forth in section 1281.2, subdivision (c). Nor, as the above-cited cases reflect, is it.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.