Defense Digest 9/08: Caveat Emptor: Beware Of High-Low Agreement Terms Where An Offer Of Judgment Is Concerned

By Bruce Seidman, Esq.*

New Jersey - Settlement

In a case of first impression, on February 20, 2008, the New Jersey Appellate Division addressed the interplay between the Offer of Judgment rule embodied in R. 4:58-2 and a high-low agreement between the parties. The court concluded that despite the exchange of e-mails between the plaintiff's attorney and the insurer's litigation manager, the lack of precision as to the terms of the high-low agreement caused the court to remand the case to the trial court to conduct a hearing to resolve the terms of the agreement between the parties. Because the devil is in the details, an understanding of the facts is necessary.

Prior to trial, plaintiff's counsel made a timely offer of judgment for $650,000, which was not accepted by the defendant. During the course of trial, the parties reached an apparent agreement as to a high-low agreement. Plaintiff's counsel sent an e-mail to the litigation manager in which he confirmed "what I believe we agreed to for the HiLo. The high is $1,000,000 and the low is $175,000." Counsel also included the following caveat:

These numbers apply to the verdict and prejudgment interest ONLY. They do not apply to legal fees and litigation costs that may be awarded in the event that Plaintiff's Offer of Judgment is successful and the court awards such fees and costs. For instance, if Plaintiff gets a $1,400,000 verdict and the court then awards Plaintiffs counsel fees and costs under R. 4:58 of $150,000. You pay only $1,000,000 of the verdict but the entire $150,000 of the fees/costs awarded.

The litigation manager replied via e-mail to plaintiff's counsel accepting "the terms of this high/low agreement" and further stated that "I do not think the legal fees issue is going to be an issue because we do not think the offer of judgment will be met by the verdict. Rather than walk away from the agreement, I will add this marginal risk factor to the deal."

In response, plaintiff's counsel faxed a letter to the litigation manager reciting that "[m]y January 18 e-mail at 12:17 p.m. set forth our agreed high low and preserv[es] our offer of judgment remedies." Repeating verbatim the language from his earlier e-mail, plaintiff's counsel reaffirmed that these terms "set[] forth the deal."

Although the jury returned a verdict for plaintiff in excess of $5 million, pursuant to the high-low agreement, the plaintiff's recovery was limited to $1 million. The plaintiff's motion, under the offer of judgment rule, for "interest, costs and attorneys fees" was partially opposed by the defendant as to the claim for interest on the grounds that the plaintiff had waived prejudgment interest in the high-low agreement. The trial court accepted the plaintiff's argument that the interest permitted under the offer of judgment rule was a "sanction interest" fundamentally different than the make-whole traditional prejudgment interest permitted under R. 4:42-11(b).

On appeal, the court observed that a high-low agreement was a contract subject to the traditional rules of contract interpretation. If the terms were clear, they were to be enforced as written. If terms were ambiguous, such terms were generally to be construed against the drafter of the contract. Where terms were ambiguous, the court noted that to assist the trial court, parties may introduce parol evidence regarding the negotiations and their respective understanding of the agreement. If the submitted evidence created a material dispute of fact, the trial court should resolve the dispute by holding an evidentiary hearing.

While normally a plaintiff would not be entitled to prejudgment interest above the "high," the parties were free to negotiate a different arrangement. The defendant argued that the plaintiff had waived all prejudgment interest. The plaintiff argued that his e-mail implicitly reserved the right to interest under the offer of judgment rule. However, the court observed that plaintiff only reserved the right to claim "legal fees and litigation costs." Therefore, the court found the high-low agreement to be ambiguous.

The court observed that by its very terms, a party who prevailed under the offer of judgment rule was entitled to "prejudgment interest of eight percent on the amount of any money recovery from the date of the offer...but only to the extent that such prejudgment interest exceeds the interest prescribed by R. 4:42-11(b), which also shall be allowable." The court concluded that while the two forms of interest served different purposes, lending credence to the plaintiff's argument, the ambiguity in the high-low agreement remained. The high-low agreement's provision to waive prejudgment interest on a verdict, but to retain the right to counsel fees and litigation costs under the offer of judgment rule, could have been understood by the insurer as a waiver of prejudgment interest under both R. 4:42-11(b) and R. 4:58-2. Therefore, the court remanded the matter to the trial court for a hearing to take testimony from both plaintiff's counsel and the litigation manager.

Finally, the court resolved one last issue and held that prejudgment interest, if appropriate, should be calculated on the $1million "high" and not the actual verdict in excess of $5 million.

When a high-low agreement is negotiated in the context of an offer of judgment, the details about attorney fees, costs, and prejudgment interest must be set forth with precision.

* Bruce is an associate with our Roseland, New Jersey, office and can be contacted at (973) 618-4173 or via e-mail at baseidman@mdwcg.com.