You are in the middle of a California business lawsuit, and a letter arrives from the other side's attorney. It offers a set amount of money to end the case. The top of the page says "Offer to Compromise" and points to Code of Civil Procedure section 998. The response period is generally 30 days, subject to service rules, and can end sooner if trial or arbitration begins.
It looks like an ordinary settlement offer, but it is not. A 998 offer has financial consequences. If you are the plaintiff and reject a qualifying defense offer, failing to obtain a more favorable result can cut off your post-offer costs and make you pay the defendant's. When an applicable contract or law authorizes attorney's fees, those costs can include fees. This post explains how the cost shifting works.
Why a 998 Offer Matters Right Now
Many business owners assume a 998 offer only matters if the case goes to trial. In Madrigal v. Hyundai Motor America (2025) 17 Cal.5th 592, the California Supreme Court held that settling before trial does not, by itself, eliminate cost shifting from an earlier rejected 998 offer. The statutory rules can still apply when their requirements are met, unless the settlement provides otherwise.
In practical terms, a 998 offer sets a bar the moment it is served. Every later decision about spending money on discovery, experts, and trial preparation is measured against that bar. A choice made in the first few months of a lawsuit can decide who pays for the work done in the last few months.
What Is a 998 Offer in California?
A 998 offer, also called an offer to compromise or an offer to allow judgment, is a written settlement offer made under Code of Civil Procedure section 998. Any party can make one, including a plaintiff, a defendant, and a party who filed a cross-complaint. The offer must be served at least 10 days before trial or arbitration begins.
The offer must include a provision for signed written acceptance. The recipient accepts through its attorney, or personally if unrepresented. In a court action, the accepted offer and proof of acceptance are filed for entry of judgment. An unaccepted offer is deemed withdrawn after 30 days, subject to applicable service extensions, or when trial or arbitration begins, whichever occurs first. It cannot be introduced as evidence at trial, but may later affect costs.
What Makes a 998 Offer Valid?
A valid offer must let the recipient evaluate its terms and the court compare it with the eventual result. In Sanford v. Rasnick (2016) 246 Cal.App.4th 1121, an offer requiring an undescribed settlement agreement was invalid. An offer also must be made in good faith: it must be realistically reasonable under the circumstances and have a reasonable prospect of acceptance. Invalid offers do not trigger cost shifting. Have counsel review the terms, including costs and attorney's fees.
How Does a 998 Offer Shift Costs?
The consequences depend on who made the offer and who rejected it. A defendant's offer has different consequences from a plaintiff's offer.
When a Defendant Makes the Offer
Under section 998(c)(1), when a plaintiff rejects a qualifying defense offer and fails to obtain a more favorable judgment or award, the plaintiff loses recoverable post-offer costs and owes the defendant's recoverable post-offer costs. The court may also award the defendant reasonable, necessary post-offer expert witness costs. Under subdivision (e), the defendant's cost award is deducted from the plaintiff's damages; an excess can produce a net award to the defendant.
The comparison excludes post-offer costs under subdivision (c)(2). Recoverable pre-offer costs and fees can affect it, but the calculation depends on whether the offer includes them, provides for them separately, or is silent. The court must compare equivalent amounts, accounting for costs and fees on both sides where appropriate. See Heritage Engineering Construction, Inc. v. City of Industry (1998) 65 Cal.App.4th 1435 and Martinez v. Eatlite One, Inc. (2018) 27 Cal.App.5th 1181.
Here is a hypothetical. The defendant supplier makes a valid $300,000 offer expressly including all recoverable costs and attorney's fees. You reject it and later obtain $250,000 in damages plus $20,000 in recoverable pre-offer costs and fees. Your $270,000 recovery does not beat the offer. If the court awards the supplier $60,000 in recoverable post-offer costs, the offset leaves a $210,000 net recovery before accounting for your own legal bills. You also cannot recover your post-offer costs. Actual awards depend on the offer and applicable law.
When a Plaintiff Makes the Offer
The consequences are different under section 998(d). If a defendant rejects a qualifying plaintiff's offer and fails to obtain a more favorable judgment or award, the court may award the plaintiff reasonable, necessary post-offer expert witness costs in addition to otherwise recoverable costs. Trial expert fees are subject to the limits in Government Code section 68092.5, not a fixed dollar ceiling.
Subdivision (d) does not independently authorize attorney's fees. A plaintiff may still recover fees under an applicable contract, statute, or other legal basis; making a 998 offer does not itself create that entitlement.
Can a 998 Offer Cut Off Attorney's Fees?
Yes, and this is the part that surprises most business owners. Section 998 talks about costs, not attorney's fees. But under Code of Civil Procedure section 1033.5, attorney's fees are an allowable cost when a contract, a statute, or other law authorizes them. Fees awarded under Civil Code section 1717 are treated the same way. So when your contract has an attorney's fees clause, the fees it allows become part of the costs, and section 998 can cut them off or shift them.
The California Supreme Court explained how this works in Scott Co. of California v. Blount, Inc. (1999) 20 Cal.4th 1103. A mechanical subcontractor sued the general contractor on a convention center project. The contractor had offered $900,000 to settle, and the subcontractor refused. After trial the subcontractor was awarded $442,054. The Court held that the subcontractor could still recover the fees and costs it incurred before the offer, but not its attorney's fees after the offer.
The other half of the ruling is the one that matters most. The contractor, who lost at trial, was allowed to recover its attorney's fees for the period after its offer. The Court reinstated the trial court's award of those post-offer fees. In short, pre-offer fees stayed with the plaintiff, and post-offer fees moved to the defendant. For a broader look at fee clauses, see our post on whether you can collect your attorney's fees if you win your case.
Does a 998 Offer Shift Attorney's Fees If Your Contract Has a Prevailing Party Clause?
Start with the normal rule. Many business contracts award attorney's fees to the prevailing party. In an action on the contract, Civil Code section 1717 generally makes that right reciprocal, even if the clause favors only one side. The prevailing party usually obtained greater relief on the contract, but the court can find neither party prevailed.
A defense offer adds a second layer. If you are the defendant and the plaintiff rejects your qualifying offer but fails to obtain a more favorable result, section 998(c) can shift recoverable post-offer costs to the plaintiff. Those costs can include reasonable attorney's fees when the governing contract and applicable law authorize them. In Scott, the defendant was treated as the prevailing party for post-offer cost purposes, despite not prevailing on the underlying damages claim.
The result can be split. A plaintiff can still be the prevailing party on the contract and collect fees from before the offer, while owing the defendant's fees from after the offer. The court sorts each side's legal spending by date, then nets the two.
The Limits of 998 Fee Shifting
Three limits keep this from being automatic. First, section 998 does not create a fee entitlement; a contract, statute, or other law must authorize fees. Second, the offer must be valid and made in good faith, and the final result must not be more favorable than the offer. An equal result can trigger the statute. Third, recoverable fees must be reasonable, with the amount set by the court.
Contract claims have another important limit. Under Civil Code section 1717(b)(2), an action voluntarily dismissed or dismissed pursuant to settlement has no prevailing party for purposes of that section. A rejected 998 offer does not override that restriction. Ford Motor Credit Co. v. Hunsberger (2008) 163 Cal.App.4th 1526 applied this rule after a voluntary dismissal. Other claims, fee statutes, and settlement terms require separate analysis.
What Happens If the Case Settles After You Reject a 998 Offer?
In Madrigal, the plaintiffs let two defense offers expire and later settled for $39,000 on the first day set for trial, after pretrial motions. The second offer included a $55,556.70 payment option, plus $5,000 in attorney's fees or an amount set by the court. The Supreme Court rejected the view that settlement necessarily avoided section 998. Whether the offer was valid and more favorable remained for consideration on remand.
The parties may agree to their own allocation of costs and fees. Otherwise, section 998's default rules can apply when their requirements are met. Madrigal involved statutory lemon-law fees; it does not erase section 1717's limits on contractual fees after dismissal. Address fees and costs expressly in any later settlement.
What NOT to Do When You Receive a 998 Offer
Do not let the clock run. An unaccepted offer is deemed withdrawn when its applicable acceptance period expires, but its potential cost consequences can survive. Calendar the deadline using the service method and trial date.
Do not treat it as an insult. A low offer is not automatically invalid, but it still must satisfy section 998's good-faith requirements. Evaluate it against the evidence, expected legal spending, and realistic outcome.
Do not compare the dollar figure alone. Compare equivalent amounts, accounting for how the offer treats recoverable pre-offer costs and fees. Separately assess future spending and possible cost-shifting exposure.
Do not send an offer that ignores fees. Whether your offer is “plus” costs and fees or “including” them changes the target the other side has to beat. Choose the wording on purpose, with an attorney.
Do not settle later without allocating costs. After Madrigal, an unaddressed rejected offer can follow you into a settlement.
Documents to Gather
Before you talk with an attorney about a 998 offer, pull together the following:
- The 998 offer itself, with the date and method of service
- The contract and any attorney's fees clause
- Your attorney billing statements to date, so pre-offer fees can be separated from later fees
- Any expert retainer agreements and invoices
- The complaint, the answer, and the current trial date or scheduling order
- Your damages calculation, with supporting records
When to Bring in an Attorney
Bring in an attorney the day a 998 offer arrives, or before you send one. The response period is short, and the decision turns on valuation, fee clause wording, and trial risk. If you have not yet been served with a complaint, our guide on what to do when your business is sued in California covers the first steps. If the dispute is already in litigation, our business litigation attorneys can review the offer against your contract and your case.
The Takeaway
A 998 offer is a settlement offer with consequences. A plaintiff who fails to beat a qualifying defense offer can lose post-offer costs and owe the defendant's recoverable costs, including independently authorized attorney's fees. A plaintiff's offer has different consequences. Later settlement does not automatically erase the earlier offer. Treat every offer as a deadline, valuation, and fee question.
Get Advice on Your 998 Offer Before the Deadline
If you are facing this situation, the sooner you get counsel involved, the more options you have. LawPLA works with California business owners statewide to protect their business, livelihood, and legacy. Call our office at 213-293-7881 or reach us through our contact page to discuss your case. Have you received a 998 offer, or are you thinking about sending one?