Employer that Failed to Pay Arbitration Fees on Time Could Not Compel Arbitration

​An employer that failed to pay arbitration fees within 30 days after they were due was in material breach of the arbitration agreement it had with a former employee and so could not force arbitration of his claims, a California appeals court recently ruled. A 2019 amendment to the California Arbitration Act was not ambiguous and mandated the conclusion that the employee be allowed to proceed in a judicial forum, the appeals court said.

The employee filed a complaint against the employer alleging 20 causes of action relating to his former employment. The employee had entered into an arbitration agreement with the employer, agreeing to arbitrate all workplace disputes, and based on that agreement, the employer filed a motion to compel arbitration.

The trial court granted the motion to compel arbitration, but, although the employer paid the filing fee when due, it failed to pay a later invoice sent by the service, which sought a retainer to cover arbitration costs.

The employer eventually paid the retainer, but not until 34 days after it was due. When the employer failed to pay within 30 days, the employee moved to terminate arbitration proceedings, and the trial court granted the motion.

The employer appealed.

2019 Additions to the California Arbitration Act

The appeals court first noted that, in 2019, the California Legislature added Sections 1281.97 and 1281.98 to the California Arbitration Act. Section 1281.97 concerns a failure to timely pay "the fees or costs to initiate" an arbitration proceeding, while 1281.98 concerns a failure to timely pay "the fees or costs required to continue" such a proceeding.

Section 1281.98 provides that if the party that has drafted an arbitration agreement fails to pay the fees or costs required to continue the arbitration proceeding within 30 days of their 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" to proceed with arbitration.

The provision further states thatif the employer breaches the agreement by failing to make payments on time, the employee may withdraw the claim from arbitration and proceed in court.

The employer argued on appeal that the trial court should have considered additional factors beyond the late payment—such as whether the late payment created delay in the arbitration proceedings or otherwise prejudiced the employee—to determine whether the employer materially breached the arbitration agreement.

It argued that the California Legislature's purpose in enacting Section 1281.98 was to prevent delay in arbitration proceedings, and that the employer's late payment did not cause any delay and did not prejudice the employee.

"Notably missing from this argument, however, is an examination of the words of the statute," the appeals court said. The statute plainly states that an employer that fails to pay arbitration costs on time is in "material breach" of the arbitration agreement, and that once the agreement has been breached, the employee may then bring a claim in court.

There is no language in Section 1281.98 that grants a trial court discretion to depart from the statute's straightforward material breach rule, the appeals court said. The employer argued that although the statute was silent regarding a court's discretion to consider factors such as prejudice or delay caused by the late payment of required arbitration fees, the appeals court should consider the public policy and legislative history of Section 1281.98 to determine its appropriate application here.

The court disagreed. Adopting the employer's argument would amount to rewriting Section 1281.98 to create exceptions to the statutory definition of material breach where none exists, the court said, noting that it lacked that power. 

The court then said that because it rejected the employer's argument based on the plain language of Section 1281.98, it was not required to delve into the provision's legislative history. Nonetheless, it noted that the legislative history did not support the employer's interpretation of the statute. 

The legislative history indicated that state legislators sought a clear and unambiguous rule for courts to apply in determining whether late payment of arbitration fees by a drafting party constituted a material breach of an arbitration agreement, the court said. 

It concluded that the trial court did not err in refusing to order arbitration of the employee's claims.

De Leon v. Juanita's Foods, Calif. Ct. App., No. B315394 (Nov. 23, 2022).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.