CCP §998 Offer:  A Settlement Offer with Strings Attached

For those of you who have been involved in litigation or arbitration, you may be aware of a legal tactic known to lawyers as a “CCP 998 Offer.”  If you are not, it is a statutory compromise offer which can be used strategically to force settlement of a case or effectively change its outcome.  This article discusses the purpose of a CCP §998 Offer and how it works.

I.      Purpose of a CCP §998 Offer

A CCP §998 offer is a settlement offer with strings attached, as provided by law.  It takes its name from the code section from which it derives: California Code of Civil Procedure (“CCP”) §998.  The primary purpose of section 998 is to encourage the settlement of disputes prior to trial or arbitration.  This purpose is achieved by providing incentives for the party to whom a CCP §998 offer is made to accept the offer.  The main incentive is to avoid penalties for failure to accept if the case goes to trial or binding arbitration.  As explained by one court: “The policy is plain.  It is to encourage a settlement by providing a strong financial disincentive to a party - whether it be a Plaintiff or a Defendant - who fails to achieve a better result than that party could have achieved by accepting his or her opponent’s settlement offer.”  Bank of San Pedro v. Superior Court (1993) 3 Cal.4th 797, 804.

II.      How It Works

A CCP §998 offer may be made by either party at any time up to 10 days prior to trial or arbitration.  CCP §998(b).  If Plaintiff does not accept a Defendant’s offer and fails to obtain a “more favorable judgment or award,” the penalties for failing to accept are a follows: 

(a) Mandatory Penalties:  Plaintiff loses the right to recover court costs incurred after the CCP §998 offer was made and must, in addition, pay Defendant’s postoffer costs. Plaintiff may still recover preoffer costs if found to be the prevailing party. CCP §998 (e).  These preoffer costs may include attorneys’ fees if provided for by statute or contract CCP §1033.5(a)(10).

(b) Discretionary Penalties:  In addition, the court or arbitrator has discretion to order Plaintiff to pay reasonable expert witnesses fees incurred by Defendant in connection with trial or arbitration.  CCP §998(c). 

If a Defendant fails to accept a CCP § 998 offer and Plaintiff then obtains a “more favorable judgment or award,” Defendant’s consequences are as follows:

Expert Fees: The court or arbitrator has discretion to order Defendant to pay reasonable post-offer expert witness fees incurred by Plaintiff in connection with trial or arbitration. CCP §998(d).  Defendant is still required to pay Plaintiff its costs and where provided by statute or contract, its attorneys’ fees.

The financial penalties for failure to accept a CCP §998 offer provide a strong incentive to seriously consider such offers.  Consequently, CCP §998 offers are well suited for breaking settlement impasse.  The risk of penalties, as described by one court, “...is the stick.  The carrot is that by awarding costs to the putative settler the statute provides a financial incentive to make reasonable settlement offers.” Bank of San Pedro v. Superior Court, supra, 3 Cal.4th at 804.  In other words, a party making a CCP §998 offer must realistically evaluate his or her potential liability or chance of success and make an offer based in amount on that evaluation.  Otherwise, an offer that is unrealistic (i.e., too low or too high) is likely to be beaten at trial or arbitration, in which case the offeror not only loses, but fails to recover any of the penalties to which he or she would have been entitled had the offer been more realistic.

III.    Offer Evaluation

Key to evaluating the worth of a CCP §998 offer is determining whether the judgment or award is likely to be “more favorable” should the offer be rejected and the matter proceed to trial or arbitration. In making this determination, both the judgement or award (i.e., damages) and preoffer costs are considered.  Although this computation may seem simple, it is often done incorrectly by parties evaluating a CCP §998 offer because of a misunderstanding as to what may rightfully be considered as costs.  “Costs” include those items allowable as costs to the prevailing party as a matter of law under CCP §1033.5.  This section lists a number of items allowable as costs, the most important of which for purposes of evaluating a CCP §998 offer are attorneys’ fees to which a party is entitled by statute of contract.  [CCP §1033.5(a)(10); See Heritage Engineering Const., Inc. v. City of Industry (1998) 65 Cal.App4th 1435.]

As anyone who has been involved in litigation knows, in a situation where attorney’s fees are recoverable, they can be the most costly component of the prevailing party’s judgment or award.  As such, a 998 offer failing to provide for recoverable fees incurred up to the date of the offer, will likely be disregarded.

Example

The California Supreme Court case of Scott Co. v. Blount, Inc. (1999) 20 Cal. 4th 1103, is illustrative of how a CCP §998 Offer can be used to change the outcome of a case.  It involved a construction dispute between Plaintiff Scott Co., a mechanical subcontractor to Defendant Blount, Inc. on the San Jose Convention Center project.  Scott filed suite alleging damages of $2,000,000 for various cost overruns and delays.

Prior to trial, Blount made a CPP 998 Offer for $900,000.  Plaintiff rejected the offer and made a counter demand of $1.5 million.  The parties went to trial.

At trial, Plaintiff was awarded $442,054 in damages.  Plaintiff had preoffer attorneys’ fees and costs totaling $226,812.  Thus, its total award was $668,866, an amount less than the $900,000 CCP §998 Offer.  Since Plaintiff failed to “beat the offer,” Defendant was entitled to recover its postoffer attorneys’ fees and costs of $633,984.00 and expert costs of $247,652, for a total award of $881,635,  Thus, by making the CCO §998 Offer, Blount changed the outcome of the case.  Rather than owing Scott Co. $668,666, it was entitled to recover $212,769, the difference of the awards.  Blount improved its legal position by almost $900,000 through the effective use of the CCP §998 Offer. 

Conclusion

The information provided in this issue of "Legal Notice" is general in nature and is not intended to answer every question that may arise under different fact situations and should not be relied on in the place of professional advice in a given case. If you have specific questions please contact Sweeney, Mason, Wilson & Bosomworth.