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Consequences of Failure to Make Required Deposits in Arbitration

Joel Levine

Consequences of Failure to Make Required Deposits in Arbitration
Jorg Greuel via Getty Images

Arbitrators (like all service providers) are understandably concerned with being paid for their work. While an arbitrator, of course, cannot render a merits judgment based on who pays his or her fees, efforts are made to ensure that sufficient deposits are on hand prior to the arbitrator spending time on a case. Institutional rules often provide for the preclusion of affirmative relief if a party fails to make its required deposits. 

Although there have been a few cases dealing with the issue, a failure to put up required deposits seems to constitute a breach of the contract under which the parties have agreed to arbitrate. In a recent California case where the defendant failed to timely pay the required arbitration fees, the trial court found that it had breached the parties’ arbitration agreement. Here the issue of affirmative-relief preclusion was not raised, and the court simply granted the plaintiff’s request to proceed in court.

In Keeton v. Tesla, Inc., No. A166690 (Cal. Ct. App., 1st App. Dist. June 26, 2024), plaintiff Keeton sued her employer, Tesla, for discrimination, harassment, and retaliation. In the initial court proceedings, the parties agreed to submit the dispute to arbitration as provided by Keeton’s 2017 employment agreement. Thereafter, Tesla failed to pay its arbitration fees within the 30-day period required under Section 1281.98 (a)(1) of the California Arbitration Act, despite multiple notices from JAMS, the stipulated arbitral body. Keeton moved to vacate the order submitting the dispute to arbitration and sought to proceed in court. The trial court granted the motion, finding that under Section 1281.98, Tesla materially breached the parties’ arbitration agreement, and thus Keeton was entitled to proceed with her claims in court.

The appellate court upheld this decision, rejecting in detailed discussion Tesla’s arguments that section 1281.98 was preempted by the FAA, that the arbitration agreement delegated to the arbitrator the issues of whether section 1281.98 applied, and that section 1281.98 is unconstitutional under the contracts-clause provisions of the California and U.S. constitutions.