Third-Party Indemnification Provisions Ruled Incompatible with California Code of Civil Procedure section 998 Fee-Shifting
July 15, 2021
The California Court of Appeal decided Khosrovan v. Chevron ((7/6/21 2nd Dist., Div. 7 No. B307482) __ Cal.App.5th __, 2021 WL 2797742) on July 6, 2021, holding that the value of a provision requiring an offeree to indemnify an offeror against third party suits is too uncertain to be included as a term in a 998 offer.
After obtaining Summary Judgment, Chevron sought its costs from the Plaintiffs who had failed to accept a 998 offer that proposed a waiver of costs in exchange for (1) dismissal with prejudice of the Plaintiff’s lawsuit, (2) release of all future claims based on the allegations in the complaint, including, but not limited to, claims for wrongful death, and (3) indemnity in the event such claims are filed by non-parties to this case. The Trial Court shifted Chevron’s costs (including expert witness fees) to the Plaintiffs because of their failure to accept Chevron’s 998 offer.
A 998 offer, named for California Code of Civil Procedure section 998, is a settlement offer that provides a disincentive to an offeree who fails to ultimately achieve a better result (e.g., at trial or via dispositive motion) than that offeree could have achieved by accepting the settlement offer. Namely, such an offeree will be penalized by bearing some of the offeror’s costs (potentially including expensive expert witness costs). 998 offers must state the terms and conditions of the proposed judgment, award, or release, and all terms must be capable of valuation – i.e., reduction to a dollar amount. If the terms of the offer cannot be valued after all, then how could one determine whether any ultimate result is more or less favorable than the rejected 998 offer? Thus, a 998 offer whose terms are not capable of valuation cannot trigger the associated fee-shifting provisions.
Courts have found, for instance, that a confidentiality provision in a 998 offer is not capable of valuation, and thus its inclusion in such an offer will prevent fee-shifting.1 A “1542 Waiver” (required in association with general releases of claims, both known and unknown, in California), is likewise incapable of valuation, and inclusion of such a term in a 998 offer will preempt application of the fee-shifting provision.2 In Toste v. CalPortland Const., a 998 offer was conditioned on holding the offeror harmless against all third party claims; the Court there determined that such an indemnification provision was so broad as to defy valuation.3
In the present case, Chevron attempted to distinguish its offer from Toste by arguing that its term requiring indemnification for third-party claims was substantially narrower: as opposed to all third-party claims, the Chevron 998 offer sought indemnification with respect to only third-party claims based on the allegations in the Plaintiff’s complaint. The Court here did not believe that such a distinction should produce a different result, finding instead that “a term in a settlement offer requiring a plaintiff to indemnify a defendant against third party claims defies accurate valuation,” regardless of whether the indemnification required is with respect to all third-party claims or only those based on the allegations in the complaint. The Court reasoned that (1) whether and how many third-party claims exist is uncertain, and (2) the cost of defending against any such claims is uncertain. Thus, the Court found that a provision in a 998 offer requiring the indemnification of the offeror as against claims brought by third parties is incapable of valuation, and the failure to accept such an offer cannot trigger the section 998 fee-shifting.
Going forward, litigants should be aware that inclusion of terms and conditions in a 998 offer that require indemnification with respect third parties must be avoided. Although such indemnification provisions may effectively mitigate risk, to benefit from section 998’s fee-shifting provisions, an offeror may not make an offeree responsible for costs whose existence or amount the parties cannot predict. Defense and indemnification for claims and lawsuits by third parties are inherently unpredictable, and thus may not be addressed in a 998 offer.
1Barella v. Exchange Bank (2000) 84 CA4th 793, 801, 101.
2Ignacio v. Caracciolo (2016) 2 Cal.App.5th 81, 88.
3Toste v. CalPortland Const. (2016) 245 CA4th 362.