T. M. Cobb Co. v. Superior Court

682 P.2d 338, 36 Cal. 3d 273, 204 Cal. Rptr. 143, 1984 Cal. LEXIS 189

• Court: California Supreme Court
• Decided: July 2, 1984
• Docket: S.F. 24572
• Status: Published

Opinions

Opinion

BIRD, C. J.

The sole issue presented by this case is whether an offer of compromise made pursuant to section 998 of the Code of Civil Procedure is revocable.

I.

The relevant facts are not in dispute. Real parties in interest, Sherre Sturm and William Conrow (hereafter, real parties), sued petitioner, T. M. Cobb Company, Inc., and others for the negligent design and construction of real parties’ residence. Cobb was the manufacturer and supplier of approximately 60 units of sash and glass for the windows used in the construction of the residence. Extensive leaks developed in and around the windows after construction was completed.¹

On July 21, 1982, real parties mailed to petitioner an offer to compromise pursuant to section 998 of the Code of Civil Procedure.² In the offer, real parties proposed a settlement in the amount of $10,000. In a declaration to the trial court, real parties’ attorney stated that on or about August 16, 1982, petitioner made a counteroffer of $7,000 or $8,000 on the condition the offer be accepted that day. The counteroffer was rejected, and the parties continued the discovery process.

Several depositions were taken in August. The deposition testimony suggested that petitioner was considerably more culpable than real parties had realized at the time the original offer was made. As a result, on August 20, 1982, real parties wrote to petitioner stating that they were revoking their offer of July 21st. Petitioner received the letter the following day. In a letter to real parties dated August 25, 1982, petitioner acknowledged that it had received real parties’ letter purporting to revoke their offer. Petitioner nevertheless stated that it was accepting real parties’ offer of July 21st. On the same day, petitioner filed its “acceptance” in superior court pursuant to section 998.³

Real parties then filed a motion to strike petitioner’s acceptance and petitioner filed a motion for entry of judgment in accordance with the offer. The superior court granted real parties’ motion to strike and denied petitioner’s motion for entry of judgment.

Petitioner now seeks a peremptory writ of mandate directing the superior court to vacate its order striking petitioner’s acceptance and to grant petitioner’s motion to enter judgment in accordance with the offer.

II

This court must decide whether an offer of compromise made pursuant to section 998 may be revoked by the offeror prior to its acceptance by the offeree.

Section 998, subdivision (b) provides: “Not less than 10 days prior to commencement of the trial as defined in subdivision 1 of Section 581, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time. If such offer is accepted, the offer with proof of acceptance shall be filed and the clerk or the judge shall enter judgment accordingly. If such offer is not accepted prior to trial or within 30 days after it is made, whichever occurs first, it shall be deemed withdrawn, and cannot be given in evidence upon the trial.”

“The fundamental rule of statutory construction is that the court should ascertain the intent of the Legislature so as to effectuate the purpose of the law. [Citations.]” (Select Base Materials v. Board of Equal. (1959) 51 Cal.2d 640, 645 [335 P.2d 672]; accord Martinez v. Traubner (1982) 32 Cal.3d 755, 758 [187 Cal.Rptr. 251, 653 P.2d 1046]; Moyer v. Workmen’s Comp. Appeals Bd. (1973) 10 Cal.3d 222, 230 [110 Cal.Rptr. 144, 514 P.2d 1224].) In determining such intent, the court must first look to the words of the statute. (Ibid.)

Section 998 is completely silent as to the revocability or irrevocability of offers made pursuant to that section. The statute does provide, inter alia, for termination by operation of law: an offer “shall be deemed withdrawn” if it “is not accepted . . . within 30 days after it is made . . . .” Petitioner asserts that this language signifies that the offer is irrevocable for those 30 days. However, real parties contend that the use of the word “withdrawn” in section 998 indicates that offers made pursuant to that section are revocable prior to acceptance.

Both parties read too much into the above-quoted language. This language addresses only the effect that a lapse of a prescribed period of time—30 days—will have on an offer made pursuant to the statute. Upon expiration of the 30-day period, the offer is considered withdrawn, and it may no longer be accepted. That is not the situation here. The statute does not address whether an offeror may voluntarily withdraw his or her offer prior to acceptance by the offeree and prior to the expiration of the 30-day period. Nothing in the quoted language of the statute resolves the question whether such an offer is revocable or irrevocable.⁴

It is a well-established principle of contract law that an offer may be revoked by the offeror any time prior to acceptance. (Civ. Code, § 1586; Grieve v. Mullaly (1930) 211 Cal. 77, 79 [293 P. 619]; 1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 122, p. 122; Rest.2d Contracts, § 42.) In light of this firmly established principle of contract law, it is clear that if the Legislature intended to make section 998 offers irrevocable, it would have expressly and unequivocally said so.⁵ It did not. In the absence of such language, the general rule that offers may be revoked prior to acceptance should apply.

Petitioner argues, however, that under section 998, general contract law has no applicability until after an offer has been made and accepted. Relying on the recent Court of Appeal decision in Gallagher v. Heritage (1983) 144 Cal.App.3d 546 [192 Cal.Rptr. 614], petitioner argues that general contract law principles simply do not apply to the process of offer and acceptance under the statute. In Gallagher, the court held that “[o]nce a statutory offer is made and the time for acceptance [has] expired, the offeror is cloaked with the protections provided in [section 998],” (id., at p. 550) and the offer may not be revoked by a subsequent oral offer. (Id., at pp. 547-548.) In reaching its conclusion, the Court of Appeal stated that “when an acceptance has not been effected [pursuant to section 998], contract law has no applicability.” (Ibid.)

The Gallagher court did not clearly state why it felt contract law had no applicability. The court appears to have reasoned that general contract law does not apply to the process of offer and acceptance under section 998 because the “timeliness, manner and method of offer and acceptance, is set forth in [section 998].” (Gallagher, supra, 144 Cal.App.3d at p. 550, fn. omitted.) However, this reasoning is not persuasive. Section 998 addresses some, but not all, of the aspects of the offer and acceptance process. As previously noted, it has no provision regarding the revocability of section 998 offers. (Ante, p. 277.) Nor does it address the effect of a subsequent statutory offer on a prior statutory offer. These questions can only be answered by turning to general principles of contract law.

Unlike the Gallagher court, other courts have applied general contract law principles to statutory offers of compromise. For example, in Distefano v. Hall (1968) 263 Cal.App.2d 380, 385 [69 Cal.Rptr. 691], defendants’ second statutory offer was held to have extinguished their first statutory offer in accord with the general contract rule that a subsequent offer made prior to acceptance extinguishes and replaces a prior offer.⁶ The Court of Appeal reasoned that “the theory of section 997[⁷] is that the process of settlement and compromise is a contractual one, and the applicable principles are those relating to contracts in general [citation].” (Id., at p. 385.)

And, in Ward v. Superior Court (1973) 35 Cal.App.3d 67, 69 [110 Cal.Rptr. 501], a purported revocation of a section 998 offer was held to be ineffective because it had not been communicated directly to the offeree as required by well-established principles of contract law. Citing Distefano, the court noted that “acceptance [of a statutory offer of compromise] is governed by the basic laws of contract.” (Ward v. Superior Court, supra, 35 Cal.App.3d at p. 69.)

The reasoning in Distefano and Ward is persuasive. Since section 998 involves the process of settlement and compromise and since this process is a contractual one, it is appropriate for contract law principles to govern the offer and acceptance process under section 998. There is no reason to postpone the application of contract law principles until after an offer has been made and accepted.⁸

Of course, general contract law principles should apply to section 998 offers and acceptances only where such principles neither conflict with the statute nor defeat its purpose. (See Distefano, supra, 263 Cal.App.2d at pp. 384-385.) As recognized in numerous Court of Appeal decisions, the clear purpose of section 998 and its predecessor, former section 997, is to encourage the settlement of lawsuits prior to trial. (Shain v. City of Albany, supra, 106 Cal.App.3d at pp. 298-299; Brown v. Nolan (1979) 98 Cal.App.3d 445, 449 [159 Cal.Rptr. 469]; Distefano v. Hall, supra, 263 Cal.App.2d at p. 385; Bennett v. Brown (1963) 212 Cal.App.2d 685, 688 [28 Cal.Rptr. 485].) Both parties contend that their position best effectuates that policy.

Petitioner argues that settlement is best encouraged by allowing an offer to remain open for the entire statutory period so that an offeree has a reasonable amount of time to consider the offer. In support of its position, petitioner relies on the Court of Appeal decision in Lum v. Superior Court (1983) 141 Cal.App.3d 952 [190 Cal.Rptr. 599]. In Lum, the court held that an offer of compromise made pursuant to section 998 is irrevocable for the statutory period. (Id., at p. 956.) The court reasoned that a particular settlement would be defeated if an offeror were allowed to withdraw the offer within the statutory period. (Id., at p. 955.) The argument seems to be that the legislative purpose of encouraging settlements is frustrated when an offer is withdrawn because settlement based upon that particular offer is no longer possible.

Real parties, on the other hand, contend that the policy of encouraging settlements would be frustrated by a holding that section 998 offers are irrevocable. If offers are irrevocable, real parties argue, fewer offers will be made. Accordingly, there will be fewer offers on which to base any settlement. Thus, to promote settlements, real parties argue, offers made pursuant to section 998 must be revocable.

Real parties are correct that the policy of encouraging settlements is best promoted by making section 998 offers revocable.⁹ A party is more likely to make an offer pursuant to section 998 if that party knows that the offer may be revised if circumstances change or new evidence develops. Conversely, a party who knows that he or she is strictly bound to the terms of the first offer made may be reluctant to make such an offer for fear of being locked into a position which becomes unfavorable upon the discovery of additional information. If a party is more likely to make a revocable offer, and less likely to make an irrevocable one, then more offers will be made if revocation is permitted. The more offers that are made, the more likely the chance for settlement. Thus, it is apparent that the general contract law principle that offers are revocable until accepted serves rather than defeats the statutory purpose of encouraging settlements.

The inhibitory effect on offers which would result if a rule of irrevocability were adopted is particularly evident in cases involving expert testimony. By statute, such testimony cannot be discovered until 50 days prior to trial. (See § 2037 et seq.) A party who has already made an offer may discover new evidence from the offeree’s experts which indicates that the offeree may be more culpable than the offeror first realized. In order to avoid this problem, a party might not make an offer until all the expert evidence has been discovered. By that time, it might well be too late for the party to make a section 998 offer since such offers must be made at least 10 days prior to trial. Moreover, it would make little sense to prohibit the offeror from revoking an offer which was based on an incomplete understanding of the relevant facts. To encourage parties to make offers pursuant to section 998, and to ensure that those offers are based on as complete an understanding of the facts as possible, such offers must be revocable.

This court’s determination that section 998 offers are revocable also promotes the public policy of compensating injured parties. This policy would be frustrated if section 998 offers were irrevocable. As previously noted, newly discovered evidence may indicate that a certain defendant is more or less culpable than originally thought. It might also indicate that a plaintiff is more seriously injured than appeared from the initial evidence. Under such circumstances, an offer made prior to the discovery of the additional evidence might no longer be adequate to fairly compensate a plaintiff. If the offer is irrevocable, an injured party-offeror would be bound to an offer which will not compensate him or her fairly. However, if the offer may be revoked, the offeror can either propose a new offer in light of the newly discovered evidence or proceed to trial and present all the evidence in an attempt to be compensated fairly by the trier of fact’s decision. Thus, the public policy of compensating an injured party is best served if section 998 offers are revocable.

Alternatively, petitioner contends that an irrevocable option is created when an offer is made pursuant to section 998. Petitioner asserts that consideration for this irrevocable option is conferred by the statute itself. That is, the statute confers a benefit on the offeror to which he or she would not ordinarily be entitled—costs in the event the offeree fails to obtain a more favorable judgment. And, if the offeree fails to accept the offer and fails to obtain a more favorable judgment, he or she is faced with a potential detriment—payment of costs for which the offeree would not ordinarily be responsible. In addition, petitioner argues that the necessary consent to the creation of an irrevocable option may be found in the fact that the offeror made an offer pursuant to the statute.

Petitioner’s argument that an irrevocable option contract is created lacks merit. Mutual consent—a prerequisite to the existence of the purported irrevocable option contract—is absent.

“It is universally accepted that an option agreement is a contract distinct from the contract to which the option relates, since it does not bind the optionee to perform or enter into the contract upon the terms specified in the option.” (Warner Bros. Pictures v. Brodel (1948) 31 Cal.2d 766, 771-772 [192 P.2d 949, 3 A.L.R.2d 691], italics added.) However, mutual consent of the parties is essential for a contract to exist (Civ. Code, §§ 1550, 1565), and “[cjonsent is not mutual, unless the parties all agree upon the same thing in the same sense. ...” (Civ. Code, § 1580.) “The existence of mutual consent is determined by objective rather than subjective criteria, the test being what the outward manifestations of consent would lead a reasonable person to believe. [Citation.] Accordingly, the primary focus in determining the existence of mutual consent is upon the acts of the parties involved.” (Meyer v. Benko (1976) 55 Cal.App.3d 937, 942-943 [127 Cal.Rptr. 846].)

In the present case, the parties never agreed that the offer was irrevocable or that they were consenting to an irrevocable option contract. When real parties made the offer there was no indication that the offer was irrevocable.

Petitioner’s argument—that consent is present because real parties made an offer pursuant to the statute—is flawed. Nothing in the statute implies that the offer is irrevocable. (See ante, p. 277.) Consequently, there is nothing in the statute which notifies a party that his or her offer will be irrevocable should he or she decide to make an offer pursuant to the statute.¹⁰ Thus, real parties cannot be held to have consented to the creation of an irrevocable option by simply choosing to make an offer pursuant to section 998.¹¹

Real parties made an offer to compromise pursuant to section 998. This offer was not made irrevocable by the statute, itself. Nor was an irrevocable option contract created. Since real parties properly revoked their offer prior to any acceptance,¹² petitioner could not thereafter accept the offer.¹³

III.

It is a well-established principle of contract law that offers may be revoked prior to acceptance. Section 998’s purpose of encouraging settlements is best promoted when this fundamental contract principle is applied to offers made pursuant to that section. The Legislature did not expressly provide for the irrevocability of offers in section 998, nor did it limit the applicability of contract law to that section. This court will not imply that offers are irrevocable in the face of well established contract law principles and public policies to the contrary.

The alternative writ is discharged, and the petition for a peremptory writ of mandate is denied.

Mosk, J., Kaus, J., Reynoso, J., and Poliak, J.,

* concurred.

1 Leaks had also developed in and around doors which had been supplied by other defendants. However, these defendants are not involved in the present proceeding.

2 Section 998 provides in pertinent part: “(b) Not less than 10 days prior to commencement of the trial as defined in subdivision 1 of Section 581, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time. If such offer is accepted, the offer with proof of acceptance shall be filed and the clerk or the judge shall enter judgment accordingly. If such offer is not accepted prior to trial or within 30 days after it is made, whichever occurs first, it shall be deemed withdrawn, and cannot be given in evidence upon the trial.

“(c) If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment, the plaintiff shall not recover his costs and shall pay the defendant’s costs from the time of the offer. In addition, in any action or proceeding other than an eminent domain action, the court, in its discretion, may require the plaintiff to pay the defendant’s costs from the date of filing of the complaint and a reasonable sum to cover costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, the preparation or trial of the case by the defendant.

“(d) If an offer made by a plaintiff is not accepted and the defendant fails to obtain a more favorable judgment, the court in its discretion may require the defendant to pay a reasonable sum to cover costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, the preparation or trial of the case by the plaintiff, in addition to plaintiff’s costs.”

All statutory references are to the Code of Civil Procedure unless otherwise indicated.

3 Section 998 provides that an offer is withdrawn if not accepted within 30 days. Petitioner’s acceptance was filed 35 days after real parties’ offer was mailed. Petitioner argues that its acceptance was timely on the theory that where a section 998 offer is served by mail, the time for acceptance is extended by five days pursuant to section 1013. That section provides that if a document is served by mail, any duty to make a response within any prescribed period is extended five days if the place of address is in California.

In light of this court’s determination that real parties properly revoked their offer (see post, p. 283), it is not necessary to reach the question as to whether the 30-day acceptance period in section 998 is extended by section 1013 when an offer is served by mail.

4 The dissent asserts, however, that prior authority requires the conclusion that section 998 offers are irrevocable. (See post, p. 284.) The “prior authority” relied on by the dissent consists of 19th century New York cases and a California case, Scammon v. Denio (1887) 72 Cal. 393 [14 P.98]. (Seepost, p. 287.)

Scammon, however, is inapposite. That case involved the issue as to whether a plaintiff who did not accept an offer of compromise—which was made on the day of the trial—was precluded from recovering costs where the trial had concluded before the five-day (see post, fn. 6) statutory period had expired. (72 Cal. at pp. 395-397.) The court, holding that the plaintiff was entitled to costs, noted that if the trial ended before the five days were up, the offer of compromise “simply goes for naught.” (Id., at p. 396.) The court never addressed the question as to whether statutory offers of compromise are revocable or irrevocable.

As for the New York cases, there is no rule requiring that this court follow decisions of a sister state. Moreover, the New York cases are distinguishable in that they involved a statute with a 10-day period. Section 998, on the other hand, involves a 30-day statutory period.

5 For example, the Legislature has used such unequivocal language concerning offers of dedication. Government Code section 66477.2, subdivision (a) provides that if at the time a final subdivision map is approved, any streets, paths, alleys, etc. are rejected, “. . . the offer of dedication shall remain open and the legislative body may by resolution at any later date, ...” rescind its action and accept the offer of dedication. (Italics added.) The predecessor to Government Code section 66477.2, subdivision (a) is former Business and Professions Code section 11616. (Added by Stats. 1943, ch. 128, § 1, p. 876, and repealed by Stats. 1974, ch. 1536, § 1, p. 3464, eff. March 1, 1975.) This latter section contained language identical to that emphasized above. The provisions of former Business and Professions Code section 11616 were found to have clearly indicated a legislative intent to abrogate the right to revoke (expressly or impliedly) an offer of dedication in any manner except that prescribed by the statute. (County of Orange v. Cole (1950) 96 Cal.App.2d 163, 169-170 [215 P.2d 41]; see also Stump v. Cornell Construction Co. (1946) 29 Cal.2d 448, 451 [175 P.2d 510].) By negative implication, then, the absence of such explicit language would seem to indicate a contrary legislative intent. The same reasoning applies here. If the Legislature intended to abrogate the right to revoke an offer of compromise, it would have stated with unmistakable clarity that an offer made pursuant to section 998 “shall remain open.”

6 Distefano involved a statutory offer of compromise made pursuant to the predecesor to section 998, former section 997. (Added by Stats. 1851, ch. 5, § 390, p. 113, and repealed by Stats. 1971, ch. 1679, § 1, p. 3605.) That section provided for statutory offers of compromise by defendants only. Such offers were deemed to be withdrawn if they were not accepted within five days. This five-day period was later extended to a ten-day period. (Stats. 1969, ch. 277, § 1, p. 626.) Section 998 was enacted in 1971. (Stats. 1971, ch. 1679, § 3, pp. 3605-3606.) It expanded former section 997’s coverage to include statutory offers of compromise by plaintiffs as well as defendants. Under section 998, such offers are now deemed withdrawn if not accepted within 30 days. The theory and purpose of the statute remained the same. (Compare Distefano, supra, 263 Cal.App.2d at p. 385 [§ 997] with Shain v. City of Albany (1980) 106 Cal. App.3d 294, 298-299 [165 Cal. Rptr. 69] [§ 998].)

7 See footnote 6.

8 To the extent any language in Gallagher v. Heritage, supra, 144 Cal.App.3d 546 is inconsistent with this opinion, it is disapproved.

9 To the extent that Lum v. Superior Court, supra, 141 Cal.App.3d 952 is inconsistent with this opinion, it is disapproved.

10 Since there is nothing in the statute which notifies a party—or, for that matter, any reasonable person—that an offer made pursuant to the statute is irrevocable, the dissent’s belief that “[ujnder the objective theory of contracts, [real parties] must be deemed to have intended that the offer of settlement would be open for the statutory period” is untenable. (See post, p. 289.)

It is well established that “ ‘[a]n irrevocable option is a contract made for consideration, to keep an offer open for a prescribed period.’ ” (Palo Alto Town & Country Village, Inc. v. BBTC Company (1974) 11 Cal.3d 494, 499-500 [113 Cal.Rptr. 705, 521 P.2d 1097] quoting 1 Witkin, Summary of Cal. Law (8th ed. 1973) p. 124, italics omitted.) The dissent believes that the statute provides the consideration necessary for an irrevocable option contract. (See post, p. 289.) However, even assuming there was consideration, there was no agreement “to keep an offer open for a prescribed period.” The parties did not agree to keep the offer open. The statute does not state that the offer will remain open for 30 days, nor does anything in the statute imply irrevocability. Since there was no agreement to keep the offer open for the prescribed period, there was no irrevocable option.

11 Since the “irrevocable option” fails for lack of mutual consent, this court need not address petitioner’s contention that consideration is supplied by the statute.

12 Real parties’ letter of August 10th to petitioner stating that they were revoking their offer satisfied the requirements for an effective revocation. (Civ. Code, § 1587, subd. 1.)

13 The dissent argues that this holding, combined with the literal wording of the statute, will permit parties to make offers, revoke them, and nevertheless gain the cost benefits of the statute. (See post, p. 285.) However, that anomalous result can be avoided simply by giving the word “offer” a sensible construction. It should be apparent that an offer that is revoked prior to acceptance no longer functions as an “offer” for purposes of the cost benefit provisions. (See § 998, subds. (c), (d); ante, fn. 2.)

Assigned by the Chairperson of the Judicial Council.