A statutory offer to compromise, the purpose behind California Code of Civil Procedure (CCP) § 998 is to encourage the settlement of disputes prior to trial or arbitration. CCP § 998 accomplishes this purpose by providing financial benefits to the party making the offer (“offeror”), while incentivizing the other party (“offeree”) to accept the offer in order to avoid sanctions.
In short, CCP § 998 provides a party with the ability to make a settlement offer with strings attached by providing financial disincentives to the offeree if the case proceeds to trial or arbitration.
A § 998 offer must be made in writing at least ten (10) days before trial or arbitration, and may be made by the Plaintiff or Defendant The offeree must accept the offer within thirty (30) days of the offer, or before arbitration and trial, unless the offer is revoked in writing.
Unlike contract law, a counteroffer is not a rejection of the initial offer. Furthermore, the offer must be reasonable and made in good-faith.
A CCP § 998 offer is considered reasonable if it realistically foreshadows the outcome of the case, if it were resolved at trial. Practically speaking, it must reflect an accurate estimation of what damages a jury would award plaintiff based on the defendant’s liability.
To determine reasonableness, a court will analyze whether both parties had sufficient facts and information about the merits of the claims and damages of the lawsuit at the time the offer was made. In this regard, a court will look at the facts the offeror knew, or should’ve known, at the time the offer was made.
Thus, a party considering making a § 998 should be confident that they have all the facts necessary to make an offer that realistically predicts the outcome of the case, or else their offer may be rendered unreasonable and invalid.
Accordingly, a court will look at the facts that the offeree knew or reasonably should’ve known at the time the offer was made.
Thus, if an attorney makes a § 998 early on, s/he should maintain an open channel of communication with the offeree—conveying to them any material information about the case needed in order for them to accept or reject the offer.
If the offeree lacks sufficient information regarding the merits of the lawsuit, then the offer will be considered invalid.
If an offer is determined to be reasonable, but the offeree did not accept it, the court may impose sanctions against the offeree pursuant to CCP § 998.
If a reasonable § 998 offer is rejected, there are two-scenarios in which a party may be penalized with sanctions:
(1) if a plaintiff does not accept defendant’s offer, and fails to obtain a more favorable judgment/award, plaintiff will be penalized;
(2) if a defendant fails to accept plaintiff’s offer, and plaintiff obtains a more favorable judgment or award, defendant will be penalized.
The sanctions imposed on a party vary depending on whether the plaintiff or defendant is being sanctioned, as explained below.
Under this scenario, plaintiff is penalized with mandatory sanctions. Mandatory sanctions include losing the right to recover court costs that were incurred after the § 998 offer was made, as well as being forced to pay defendant’s post-offer costs (costs accrued from the time the offer was made until judgment).
Furthermore, the court or arbitrator has the discretion to order plaintiff to pay reasonable expert witnesses fees incurred by defendant in connection with the trial or arbitration.
Unlike the previous scenario, CCP § 998 does not explicitly provide mandatory penalties for defendants, only discretionary penalties. Specifically, the court or arbitrator has the discretion to order defendant to pay reasonable post-offer expert witness fees incurred by the plaintiff in connection with the trial or arbitration.
Defendant may, however, still be required to pay plaintiff’s pre-offer and post-offer costs, including attorney’s fees, if provided for by statute or contract. Thus, in analyzing whether to make/accept an offer, attorneys should consider the attorney’s fees that the plaintiff has incurred at the time of the offer.
Although § 998 does not provide for mandatory sanctions for defendants who fail to succeed after rejecting a plaintiff’s offer, CCP § 3291 does provide mandatory penalties for such defendants in personal injury cases.
Specifically, CCP § 3291 entitles a personal injury plaintiff recovery for prejudgment interest, at a rate of 10%, calculated from the date on which the plaintiff served the CCP § 998 offer, to until the date the plaintiff received the more favorable judgment.
In order for a party to “prevail” and reap the benefits of their CCP § 998 offer, a court or arbitrator must determine that their offer was “more favorable” than the judgment. In making this determination, a court will add certain costs to the judgment, which depends on which party made the § 998 offer.
If the defendant made the offer, the judge will add only the costs that plaintiff incurred before receiving the defendant’s § 998 offer. If the plaintiff made the offer, the plaintiff’s pre-offer and post-offer costs will be added to the judgment before it is compared to the § 998 offer.
If a party is likely to recover his/her attorney’s fees and costs under CCP § 1033.5, they should include this amount in their § 998 offer.
This is based on the notion that when attorney’s fees are recoverable, they are often the most costly component of the prevailing party’s judgment or award. As such, a § 998 offer that fails to provide for recoverable fees incurred up to the date of the offer will likely be disregarded.
Lastly, liens are not considered when determining whether the judgment is more favorable than the offer to compromise.
CCP § 998 offers are effective tools because they bear the risk that the offeree may incur substantially more fees and costs if they do not take the time to carefully weigh the pros and cons of the offer.
On the flip side, the financial benefits that may be awarded to the prevailing party incentivize a party to scrutinize his/her potential liability or chance of success, and make a realistic offer based on that evaluation in an effort to settle the case.
An unrealistic offer that will likely be beaten at trial/arbitration will not only make the offeror lose, but will prevent them from recovering any of the penalties to which s/he would have been entitled had the offer been more realistic—which can end up making a lesser, more realistic offer more profitable in the end.
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