Nonmonetary terms and section 998 offers to compromise

By Houman Chitsaz

Attorney’s fees and expert costs have increasingly become an important element in the overall valuation of disputes and litigation objectives. In recognition of this fact, we see more and more contractual or statutory provisions which permit a party to recoup its attorney’s fees and litigation costs, like expert fees, by “prevailing” in the litigation. In these circumstances, a Code of Civil Procedure Section 998 Offer To Compromise can serve an important litigation tool by shifting costs if the prevailing party obtains a judgment less favorable than the offer. As we all know, if the offeree rejects a Section 998 Offer, he or she must obtain a “more favorable” judgment than the Section 998 Offer or face paying the offeror’s post-offer attorney’s fees and expert costs.

However, the Court’s determination of whether the offeree obtained a “more favorable” judgment can be rather unpredictable. In the majority of cases, Section 998 Offers include monetary and nonmonetary terms. In some cases, I have seen Section 998 Offers that contain no monetary offer, but rather a host of various nonmonetary terms. After conducting some research on the subject, I was surprised to find that there is nothing prohibiting Section 998 Offers which contain purely nonmonetary terms.

Of course nonmonetary terms can be offered in countless forms, like injunctive terms, and conditions for acceptance of monetary terms such as waiver or release of claims, confidentiality clauses, and even structured payment plans to name just a few. In these circumstances, the offeror must act with caution and consider the impact of the nonmonetary term on the Section 998 Offer. Nonmonetary terms can have a drastic impact on the value of monetary terms included in the offer and most importantly, on the overall validity of the Section 998 Offer. This is especially important when you consider that the burden of proof pertaining to the validity of a Section 998 Offer rests with the offeror and the terms contained within the offer are strictly construed against the offeror as well.

When nonmonetary terms are included in a 998 Offer, courts apply basic contract principals and look to the following two fundamental factors in order to determine whether the offer is valid and enforceable: (1) Whether the nonmonetary terms are “unconditional, sufficiently certain, and capable of valuation” to allow the court to determine whether the judgment is more favorable than the offer; and (2) Whether the terms of the offer are sufficiently specific to allow the recipient to evaluate the worth of the offer, at the time the offer is made without the aid of hindsight, and make a reasoned decision whether to accept the offer.

My research indicates that the primary danger with the inclusion of nonmonetary terms lies with the inability to value the term for Section 998 purposes. In these circumstances, the term could render the entire Section 998 Offer unenforceable. For instance, courts have held that the inclusion of a requirement that the offeree release and waive all claims, including claims that may exist outside the pending action, is impossible or impractical to value and thus invalidates a Section 998 Offer for purposes of cost shifting. (Valentino v. Elliot Sav-on Gas, Inc. (1988) 201 Ca. App. 3d 692.) However, courts have also enforced Section 998 Offers that require the plaintiff to dismiss the case with prejudice and provide defendant with a general release of all claims relating to the pending litigation, rather than accepting the 998 Offer in the form of a judgment against Defendant. (Goodstein v. Bank of San Pedro (1994) 27 Cal. App. 4th 899.) In another widely cited case, Barella v. Exchange Bank, the court found the inclusion of a confidentiality condition rendered the Section 998 Offer unenforceable. (Barella v. Exchange Bank (2000) 84 Cal. App. 4th 793.) Thus, in light of these pitfalls, attorneys should be careful that nonmonetary terms included in Section 998 Offers can be valued by the offeree at the time the offer is made and can be valued by the Court after a judgment has been entered. Otherwise, the Section 998 Offer will not serve as a “stick and carrot,” as intended by the legislators, but merely as an offer the offeree can chose to accept or reject without risk.

Nonmonetary terms can also affect the value of the monetary component of the offer. When a Section 998 Offer includes nonmonetary terms, the court must partake in an imperfect and imprecise hindsight analysis on whether the nonmonetary term dilutes or adds to the value of the monetary offer, and, if so, the court must also determine the extent to which the nonmonetary term affected the value of the monetary term. Only after making these determinations can the court find whether the litigant obtained a “more favorable” judgment than the Section 998 Offer. As one can guess, the outcome of such a determination is riddled with uncertainty.

Due to these concerns, practitioners should include nonmonetary terms in their Section 998 only after conducting a careful review of their client’s litigation objectives and conducting legal research on the subject. If the nonmonetary term is not factually specific and has been defined by the court as enforceable (e.g., release and waivers and structured settlement agreements) it can provide the offeror with more choices for settlement purposes or added protection for trial. However, if the intended nonmonetary term is unique to the specific facts of the dispute or case law defining the enforceability of the term cannot be obtained, including such a term can actually be counterproductive because it can inject more uncertainty into the possible outcome of the dispute, whether the Section 998 Offer is accepted by the offeree or not.

Houman Chitsaz specializes in business and real estate litigation. He is a partner of the law firm of Nardell Chitzaz & Alden LLP in San Rafael, CA

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