Save the Date:  California Court Finds Material Breach of Arbitration Agreement For Late Payment of Fees

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By Carol Shieh, Esq.

California Code of Civil Procedures section 1281.97 states that if an arbitration agreement requires the drafting party to pay certain arbitration fees and costs, the arbitration initiation fees and costs must be paid within 30 days after the due date, or else the party will be deemed to have materially breached the agreement and waived its right to compel arbitration. Similarly, CCP section 1281.98 sets the same 30-day period for payment of fees and costs that are required to continue the arbitration proceeding. The statutes state that unless otherwise agreed to by the parties or expressly provided in the arbitration agreement, all invoices are to be issued by the arbitration service as due upon receipt. If a breach is found under these sections, the breaching party will bear monetary sanctions.

Recently, in the matter of Espinoza v. Superior Court of Los Angeles County, a California Court of Appeal held that CCP section 1281.97, contains no exceptions for substantial compliance, unintentional nonpayment, or absence of prejudice even if the delay in payment is inadvertent, brief, and not prejudicial to the plaintiff.  In Espinoza, the defendant employer successfully brought a motion to compel arbitration and stay the court proceedings, after which the plaintiff filed a motion to lift the stay and allow her to proceed in court on the basis that defendant failed to timely pay the arbitration fees by the statutory deadline.  The trial court denied plaintiff’s motion, finding no material breach of the agreement and holding that defendant substantially complied with its obligations and did not prejudice the plaintiff.  However, the Court of Appeal reversed, ordering the trial court to lift the stay, and allowing the plaintiff to proceed with her claims in court, holding that the California legislature intended that the payment deadline under section 1281.97(a)(1) be strictly applied. 

The court further interpreted that the statutes require the breaching party to incur monetary sanctions in the form of costs and attorney’s fees.  Finally, the court stressed that there is discretion as to the issuance of nonmonetary sanctions, including evidentiary sanctions, terminating sanctions, and contempt sanctions, unless the sanctioned party acted with substantial justification or other circumstances make the imposition of the sanction unjust.   

When compelling employees to arbitration, employers should be mindful of the date invoices are received and should make timely payments within 30 days of receipt to avoid waiving their right to compel arbitration and incurring monetary sanctions. If internal payment procedures dictate a longer timeframe for funding, employers should consider adding an express provision in the arbitration agreement for a different number of days for payment.

Please contact an NFC team member if you have any questions or seek further assistance.


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