Statutory Offer to Compromise – A Potential Pitfall for CA Contractors, With a Way Out

Ian Williamson | Gordon Rees Scully Mansukhani

A statutory offer to compromise a case is a common tool in litigation in California. Under CCP section 998, a party can make an offer to the opposing party. If that offer is not accepted, the case goes to trial, and the recipient does not do better at trial than the offer, the code imposes penalties. Conversely, if you get a better outcome, the code provides benefits in the form of enhanced costs (notably including the costs of experts). It is a useful tool. However, on its face, the code contemplates that a judgment be entered against the party making payment.

For many entities, this is a non-issue. However, for contractors and professional license holders in California, that judgment can have potentially severe unintended consequences that go far beyond the litigation. Judgments arising from your work can (and in some cases must) be reported to licensing agency. Discipline can result. In addition, bonding companies look negatively at the judgments. Additionally, many bidding packages require the bidder to disclose any job-related judgments. In sum, a contractor whose attorney utilizes a 998 offer can end up with a long-lingering smear on their license and professional reputation.

For years, savvy lawyers have worked around this outcome with terms in the 998 offer that offered a settlement agreement instead of a judgment. This was an accepted practice for years, and then some appellate decisions called it into question. Good news for our licensed clients came from the Third District Court of Appeals in late May. In the case of Arriagarazo v BMW of North America, LLC (to be published, formal citation not yet available), the court specifically and unequivocally approved the offer of a settlement agreement rather than a judgment in an effective 998 offer of compromise.

The parties in the Arriagarazo case still did not get it quite right, but the court gave us a clear road map of what will be acceptable. Any doubt about the effectiveness of a 998 offer that suggests a settlement agreement instead of a judgment should be resolved. Whether other conditions can be imposed is still questionable – but this question is resolved.