In Mesa Forest Products, Inc. v. St. Paul Mercury Ins. Co. (1999) 73 Cal.App.4th 324, the appellate court concluded the defendant's postoffer payment must be added to the jury's award to determine whether the plaintiff obtained a more favorable judgment than the amount of the defendant's section 998 offer.
In that case, the plaintiff sued a general contractor with whom it had contracted to provide lumber, and the surety that had issued a payment bond guaranteeing the contractor's payments, seeking $ 122,205.24 in damages. (73 Cal.App.4th at p. 328.)
The defendants jointly offered $ 62,690, including attorney fees and costs, under section 998. (Mesa Forest Products, Inc. v. St. Paul Mercury Ins. Co., supra, at p. 328.)
The plaintiff did not accept the offer. (Ibid.) After the offer expired, the contractor sent the plaintiff a check for $ 62,690. (Ibid.)
At trial, the jury, which had been informed of the contractor's payment, awarded the plaintiff $ 13,205.85 in damages. (Id. at p. 329.)
The trial court determined the plaintiff's total recovery, including the jury's verdict and the postoffer payment by the contractor, was more favorable than the section 998 offer. (Ibid.)
The Court of Appeal affirmed.
"The surety contends that the $ 62,690 payment should be excluded because it was made after the offer to compromise. For that contention, the surety relies on the general rule that a plaintiff's postoffer costs are not considered in determining whether a more favorable judgment has been obtained. But the general rule must be applied in accordance with its purpose: 'Where the plaintiff refuses an offer of compromise by the defendant, costs incurred by the plaintiff before the time of the offer are added to the award of damages for purposes of determining whether the judgment is "more favorable" than the offer, but costs incurred after the offer are excluded from the calculation. ... The rationale for this rule is that allowing the addition of postoffer costs would defeat the purpose of section 998, subdivision (c) ... by enabling the plaintiff to increase the amount of the "judgment" simply by driving up postoffer costs.' Plainly, our conclusion that a defendant's postoffer contract payment should be considered in determining a plaintiff's success does not permit a plaintiff to inflate the judgment through postoffer conduct. On the contrary, our decision ensures that a defendant's offer to compromise will remain 'realistically reasonable under the circumstances of the particular case.' " (Mesa Forest Products, Inc. v. St. Paul Mercury Ins. Co., supra, 73 Cal.App.4th at p. 336.)
The appellate court also explained an important policy reason underlying its decision. "The surety's argument, if carried to its logical conclusion, would produce results more absurd than the one here. The payor under a contract could simply withhold payment in hopes that the payee will go away. If the payee files suit, the payor could promptly make a section 998 offer that covers a substantial portion of the debt but which would not be accepted, e.g., $ 50,000 on a claim of $ 100,000. Then, on the eve of trial, the payor could unilaterally send the payee a check for $ 75,000. At trial, the payee would recover $ 25,000. Thereafter, in ruling on posttrial motions, the trial court would find that the payee did not obtain a 'judgment' more favorable than the offer to compromise. As a result, the payee, despite its status as the prevailing party, would be entitled to recover only its filing fee and the cost of service of process. The payor, on the other hand, would be entitled to recover all of its costs, including attorneys' fees if the contract so provided. Under this scenario, the payee could celebrate a pyrrhic victory. In contrast, our interpretation of section 998 ' "... comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoids an interpretation that would lead to absurd consequences." ' " (Mesa Forest Products, Inc. v. St. Paul Mercury Ins. Co., supra, 73 Cal.App.4th at p. 335.)