Execution Of An Undisclosed Settlement Agreement Is An Invalid California Code of Civil Procedure § 998 Term

By: Zachary P. Marks
May 10, 2016

A statutory offer to compromise can be a very effective tool in settling a case or devising a litigation strategy in preparation for trial. Codified at California Code of Civil Procedure (“C.C.P.”) § 998, the primary purpose of the statute is to encourage the settlement of disputes prior to trial or arbitration. The statute operates by enabling either party to propose a settlement offer, in writing, no less than ten (10) days before trial. If the offeree rejects the offer, and subsequently fails to obtain a judgment at trial that is more favorable than the offer amount, then the offeror is entitled to recover its post-offer costs, including filing fees, attorney’s fees, and in some cases, expert witness fees. Such fees could potentially amount to hundreds of thousands of dollars, thereby incentivizing the offeree to thoroughly evaluate the offer. This dramatic cost-shifting provision is the driving force behind a § 998 offer.

The timing of a § 998 offer is critical, as the offer can be used to motivate early settlement discussions, or alternatively, to punish a party for not settling if he or she does not get a more favorable result at trial.  Common practice is for the § 998 offer to request dismissal of the action, with prejudice, and execution of a written agreement in exchange for payment.  While it is perfectly fine to require a writing memorializing the settlement, take caution with the language used to describe it, because not all agreements are made equal.

The First District Court of Appeal made this abundantly clear in its recent ruling entitled Sanford v. Rasnick 2015 WL 9238919 (Cal.App. 1 Dist.).  In Sanford, the defendant made a timely § 998 offer requiring, among other things, that plaintiff execute a written “settlement agreement” and general release.  Plaintiff allowed the offer to lapse and ultimately recovered less at trial.  Following entry of judgment, defendant sought to recover its post-offer costs, as is expressly allowed by § 998.

On appeal, plaintiff argued that the § 998 offer was invalid because it required execution of a “settlement agreement,” the terms of which were not disclosed in the offer.  Defendant argued that execution of a settlement agreement as part of a § 998 offer was standard industry practice, and that case precedent allowed for settlement agreements/releases as terms in a § 998 offer.

The Court of Appeal disagreed, holding that a “settlement agreement” is not the same as a “release.”  Here, because the specific terms of the agreement were not described or revealed, plaintiff was left to guess which terms the defendant might insist upon, and had to accept or reject the offer without knowing what the specific terms might be.  A release, on the other hand, does not contain points of negotiation and therefore does not require description as part of a § 998 term.  Ultimately, the court reasoned that allowing § 998 offers to condition acceptance upon execution of a settlement agreement, as opposed to a release, would wreak havoc on the system and must not be permitted.

About the author

Zachary P. Marks

Mr. Marks is an Associate at Chapman Glucksman Dean Roeb & Barger.

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