All passengers, including about 800 Britons, are being offered full fare refunds. Those who endured the worst of the fiasco will get additional compensation.
More than 100 passengers began a legal action in New York earlier this year after the reputation of the "Queen of the Seas" had sunk to its lowest ebb during the 1994 world cruise, which began at Southampton in mid-December.
Hundreds of passengers were left behind when the luxury liner sailed for the US after workers were unable to complete a refit in time.
Those who made the trans-Atlantic crossing complained of "Niagaras" of dirty water in toilets, corridors blocked by "unsecured materials" and a fenced off swimming pool.
The ship was then refused clearance to sail from New York. Coastguards insisted that certain jobs had to be completed before the liner could continue on to the Caribbean.
Passengers also claimed that they had been exposed to asbestos while workmen tried frantically to finish the refit as the ship sailed.
A Cunard spokesman said the settlement offer was being made to all 2,000 passengers who should have taken part in the annual world cruise.
Judges are due to give final approval to the offer on 30 January. No legal proceedings were started in Britain.
The problems began last year when Cunard decided to allow only 25 days for a major refit in Hamburg, Germany.
The vessel was far from ready to cope with all its passengers and Cunard reluctantly told 300 people that they could not travel as there were plumbing problems with their cabins.
The fiasco effectively cost Cunard chairman John Olsen his job. In May 1995, it was announced that he was leaving "by mutual agreement"