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OFFER OF JUDGMENT IN ARBITRATION – SEEING AN OLD TOOL IN A NEW LIGHT

The Michigan Court Rules provide that, as a means of dispute resolution, a party may, during the course of an action, make an “offer of judgment.” MCR 2.405.  The offer, which must be written, is made by one party to another offering to enter a judgment for a sum certain, including all costs and attorney fees.  MCR 2.405(A)(1).  If the offer is accepted, the judgment is entered and the case is over.  MCR 2.405(C).  If the offer if rejected, the case proceeds. Id.  If the offer is rejected, however, the rejecting party may be held liable for the prevailing party’s “actual costs” – including reasonable attorney fees – incurred in the prosecution or defense of the action.  MCR 2.405(D).  The rejecting party is responsible for the offering party’s costs and attorney fees if the verdict is more favorable to the offering party than the offer. Id.

This tool has largely been ignored by Michigan practitioners because the rule’s cost and fee shifting function is not applicable where a case is submitted to case evaluation (which has its own cost-shifting rules). MCR 2.504(E); see also MCR 2.403(O).  That is, even where an offer of judgment is made and rejected, if the case is submitted to case evaluation, the provision allowing for the prevailing party to collect attorney fees from the rejecting party under the offer of judgment rule is not applicable.  MCR 2.405(E).

But a recent published Court of Appeals opinion has breathed new life into the offer of judgment rule in a new context – arbitration.  In Simcor Construction, Inc v Trupp, ___ Mich App ___, decided January 9, 2018 (Docket No. 333383) the Court of Appeals held that an offer of judgment made during the course of an arbitration proceeding, may be enforced in a later court action to confirm the arbitration award.  In Simcor Construction, the plaintiff builder commenced an arbitration proceeding against the defendant homeowner on a claim for breach of contract.  During the arbitration, the defendant made an offer of judgment of $2,200.  The plaintiff rejected the offer, the matter did not settle, and the arbitrator conducted the arbitration proceeding.  The arbitrator eventually dismissed the plaintiff’s claims against the defendant with prejudice and without costs.  The plaintiff then brought a motion to vacate the award and the defendant brought a motion to confirm the award and for an additional award of costs and fees under MCR 2.405, as a sanction for the plaintiff rejecting the offer of judgment.

The Court of Appeals held that the offer of judgment sanctions apply, even though the case was arbitrated.  The Court of Appeals reasoned that because: (1) the term verdict, as used, in MCR 2.405, included “a judgment entered as a result of a ruling on a motion after rejection of the offer of judgment” and (2) the judgment in this instance was entered following a motion to confirm the award, the sanctions provision applied.

As a practical matter, the use of an offer of judgment (and its attendant sanctions provisions) in the course of an arbitration proceeding has substantial appeal because, unlike a traditional state court action – which is almost always sent to case evaluation – there is no case evaluation process for arbitration proceedings.  Without a referral of the case to case evaluation, there is no possibility that MCR 2.405(E) comes into play to negate the imposition of costs and fees on the rejecting party.  In an arbitration proceeding, using an offer of judgment can be an effective way for a party to introduce meaningful consequences to an opposing party refusing to negotiate a settlement in good faith.

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