Most California business cases settle—but few settle on terms as favorable as they could, because many litigants never deploy the one settlement device the Legislature armed with real consequences. A statutory offer to compromise under Code of Civil Procedure section 998 is not just a settlement proposal; it is a cost-shifting instrument that penalizes an opponent for guessing wrong about the value of the case.

This guide explains how section 998 works, what makes an offer valid, the consequences of rejecting one, and how businesses can use—or defend against—these offers in California civil litigation.

How a Section 998 Offer Works

Under Code of Civil Procedure section 998, any party may serve a written offer to allow judgment on specified terms up to ten days before trial. The offeree has 30 days to accept (or until commencement of trial, if sooner). If the offer is not accepted, it is deemed withdrawn—and the case proceeds with a benchmark in place. The consequences then turn on whether the rejecting party obtains a better result at trial.

If the Plaintiff Rejects a Defense Offer and Does Not Beat It

A plaintiff who declines a defendant's 998 offer and fails to obtain a more favorable judgment suffers two penalties: the plaintiff cannot recover its own post-offer costs, and it must pay the defendant's costs incurred after the offer. (Code Civ. Proc., § 998, subd. (c)(1).) The court may also order the plaintiff to pay a reasonable sum for the defendant's post-offer expert witness fees—an item that can reach six figures in commercial cases and is otherwise unrecoverable.

The exposure compounds where the contract contains a prevailing-party fee clause. Because contractual attorney's fees are recoverable as an item of costs, a plaintiff who fails to beat a 998 offer can forfeit its post-offer attorney's fees as well. (Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1112-1114.) In a fee-clause case, rejecting a well-calibrated 998 offer can convert a courtroom win into a net financial loss.

If the Defendant Rejects a Plaintiff's Offer and Does Not Beat It

Where the defendant declines the plaintiff's 998 offer and the plaintiff obtains a more favorable judgment, the court in its discretion may require the defendant to pay the plaintiff's post-offer expert witness fees. (Code Civ. Proc., § 998, subd. (d).) The 10 percent prejudgment interest enhancement of Civil Code section 3291 applies only to personal injury actions, so its leverage is unavailable in ordinary commercial cases—the expert-fee and cost consequences are the business litigant's pressure points.

What Makes a 998 Offer Valid

Courts enforce the statute's formalities strictly, and a defective offer shifts nothing. The rules that matter most:

• Written, statutory, and acceptable on its face. The offer must be in writing, reference section 998, and include a provision allowing acceptance by signed statement. (Code Civ. Proc., § 998, subd. (b).)
• Certain and unconditional terms. An offer laden with vague conditions—broad releases of unpled claims, confidentiality terms of uncertain value—invites a finding that it cannot be evaluated, defeating cost-shifting.
• Good faith. The offer must be realistically reasonable under the circumstances, carrying some prospect of acceptance; token offers made only to trigger penalties do not qualify. (Elrod v. Oregon Cummins Diesel, Inc. (1987) 195 Cal.App.3d 692, 698-699.)
• Proper allocation in multi-party cases. An unallocated joint offer to (or from) multiple parties is generally invalid because no single offeree can evaluate its own exposure.

Strategy for Business Litigants

Timing drives effect. An offer served early maximizes the window of shifted costs but may precede the discovery needed to make rejection unreasonable; an offer served after key depositions is better calibrated and harder to dismiss as premature. Defendants with strong liability defenses should consider a meaningful early offer to start the cost clock; plaintiffs with documented damages should serve an offer they can prove up to the dollar at trial. Every offer should be modeled against the realistic verdict range and the fee clause—our guides on litigation costs and case timelines supply the baseline numbers.

A 998 offer also pairs naturally with earlier settlement tools: a well-documented demand letter frames the claim, and the statutory offer then puts a price on ignoring it. If the case is headed to contractual arbitration instead of court, section 998 still applies—the statute expressly extends to arbitrations, a point often missed. (See our comparison of arbitration and litigation.)

Once a 998 settlement is reached, paper it properly so it can be enforced summarily—see our guide to enforcing settlement agreements under section 664.6.

Frequently Asked Questions

Q: How long do I have to accept a 998 offer?
A: Thirty days after service, or until trial commences, whichever comes first. Silence is rejection—the offer is deemed withdrawn and cannot be accepted later.

Q: Does rejecting a 998 offer mean I pay the other side's attorney's fees?
A: Not by itself. Section 998 shifts costs and, in the court's discretion, expert witness fees. But where a contract or statute makes attorney's fees recoverable as costs, failing to beat the offer can cut off your own post-offer fees—a severe penalty in fee-clause cases.

Q: Can I make a 998 offer for a token amount just to trigger penalties?
A: No. The offer must be made in good faith with a realistic prospect of acceptance. Token offers are routinely denied cost-shifting effect, though a modest offer can be valid where liability is genuinely doubtful.

Q: Do 998 offers work in arbitration?
A: Yes. The statute applies to contractual arbitrations as well as court actions, and the same cost-shifting consequences follow.

Q: What happens if the verdict exactly equals the offer?
A: The rejecting party must obtain a more favorable result. A tie goes to the offeror—judgment equal to the offer means the offeree failed to beat it.

This article is provided for general informational purposes and is not legal advice.

Need help? Contact Kolmogorov Law, P.C. at (909) 235-6116 or visit kolmogorovlaw.com to schedule a consultation with our business litigation team in Irvine, California.