Negative declaratory action: Does the asserted claim exist?

When a negative declaratory action may be considered

An action requires that the opposing party invokes a specific claim or creates serious uncertainty regarding a legal relationship. An explicit demand for payment, a letter of claim from a solicitor, a declaration of set-off or the announcement of legal action may suffice for this purpose. Merely worrying that someone might raise a claim in the future is, however, generally not sufficient.

The subject matter of the proceedings can only be an existing legal relationship. The court does not make an abstract determination as to how a legal provision is to be interpreted, nor does it rule in isolation on individual facts or preliminary issues. The application should therefore be directed at establishing the non-existence of a specific claim arising from a sufficiently defined set of facts. Where there are multiple grounds for the claim or time periods involved, it must be carefully examined how far the sought declaration is intended to extend.

In business practice, this legal instrument is used, amongst other things, in cases of failed contract negotiations, disputed invoices, alleged defects, the consequences of withdrawal or termination, claims for directors’ and officers’ liability, insurance claims and, above all, in cases of alleged warnings regarding intellectual property rights.

A claim is particularly relevant where the opposing party repeatedly raises the claim but, despite being requested to do so, does not bring an action for performance. In such a case, the alleged debtor may have an interest in ensuring that provisions, financing, the annual audit or a transaction are not burdened indefinitely by an outstanding claim.

The legal interest in a declaratory judgement as a condition of admissibility

The legal interest in a prompt determination is not a mere formality. The claimant must demonstrate why the existing uncertainty is currently affecting their legal position and how this can be resolved by the judgment. A claim raised in earnest generally establishes this interest, as the claimant may bring legal proceedings at any time or cause further financial detriment.

This interest may be lacking if the opposing party has unequivocally and bindingly withdrawn the claim. A non-binding statement such as not taking legal action ‘for the time being’ is not necessarily sufficient for this purpose. To avoid declaratory proceedings, a statement is required that actually puts an end to the existing uncertainty.

If the legal situation changes, the interest in a declaratory judgement must be reassessed. If the claimant, for their part, brings an action for performance or a counterclaim regarding the same claim, there is generally no longer any need for a parallel negative declaratory judgement, as the action for performance resolves the matter in dispute more comprehensively. Which action takes precedence and how the proceedings first brought before the court are to be continued depends on the timing and the specific claims made.

The claimant should therefore expect the opposing party to respond to the action for a negative declaration with a counterclaim for payment. This effectively transforms proceedings concerning non-existence into ordinary proceedings for performance, in which decisions may also be made regarding payment, interest and costs.

Who has to prove what?

The designation of the parties in the proceedings must not obscure who is, in substance, asserting a claim. As a general rule, the party deriving rights from a fact giving rise to a claim must set out and prove the relevant prerequisites. In an action for a negative declaration, the defendant therefore generally bears the substantive burden of setting out and proving the claim they are asserting.

Nevertheless, the claimant must not confine themselves to a blanket denial. They must set out the alleged legal relationship and the dispute in such a way that the court can assess their application for a declaratory judgement. The claimant must present a substantiated case regarding defences and objections whose conditions lie within their control. These may include, for example, performance, set-off, the limitation period, an exclusion of liability or a subsequent amendment to the contract.

For this reason, the evidence strategy should be in place before the claim is filed. It should be clarified which contracts, addenda, emails, minutes, invoices and technical documents exist. Which individuals might be considered as witnesses? Are there any documents that reveal other claims that have not yet been raised? Although a claimant bringing the case themselves initially determines the timing and the claim, they also open their own file to a comprehensive, contentious legal process.

In the case of technical, construction-related or accounting issues, an expert’s report may be required. This significantly increases both the duration and the costs. A negative declaratory action is therefore not automatically ‘streamlined’ simply because the claim is worded in the negative. The effort involved and the taking of evidence depend on the complexity of the alleged claim.

Place of jurisdiction, value of the claim and costs

Jurisdiction is determined in accordance with the general rules and the underlying legal relationship. Contractual places of jurisdiction and arbitration clauses also apply to actions for a negative declaration. Anyone wishing to take swift action should therefore first check whether a state court has jurisdiction, which court has local jurisdiction, and whether a prescribed conciliation or escalation procedure must be followed before bringing an action.

The value of the claim is generally based on the economic interest in defending against the asserted claim. In the case of a quantified claim for payment, the amount of the claim often serves as the starting point. Depending on the subject matter and scope of the declaration sought, the court may apply a reduction or make a different assessment. The value of the claim determines the amount of court and legal fees.

The claimant must initially advance the court costs. If they lose the case, they generally bear the necessary legal costs themselves. If, on the other hand, they win, the opposing party must reimburse the statutory costs. Individually agreed solicitors’ fees that exceed the statutory rates are not usually reimbursed in full.

If an action for performance or a counterclaim is brought, the value of the claim and the costs may change. Even the withdrawal of a negative declaratory action does not automatically eliminate the cost risk. Anyone bringing a claim solely to exert pressure in negotiations or to influence the place of jurisdiction should therefore draw up a realistic litigation budget and a robust settlement strategy in advance.

Res judicata presents both opportunities and risks

A judgement in favour of the claimant conclusively establishes that the claim set out in the application does not exist. The opposing party cannot assert the same claim between the same parties again, insofar as the res judicata applies. This is precisely where the benefit of the action lies: a burdensome claim is not merely rejected, but legally dispelled.

The downside is significant. If an admissible negative declaratory action is dismissed as unfounded, the defences raised against the claim are legally rejected to the extent of the subject matter of the dispute. The Federal Court of Justice emphasises that this means the existence of the contested claim can be positively established. The claimant therefore risks more than simply an unsuccessful defence.

For this reason, the claim must be formulated precisely. A claim that is too broadly worded may cover an unnecessarily large number of claim variants and increase the risk of the decision becoming final. A claim that is too narrow may, under certain circumstances, fail to remove the economic uncertainty. Particularly in the case of recurring payments, partial claims or multiple breaches of contract, it must be clarified which set of facts is to be the subject of the proceedings.

A settlement should also expressly regulate this scope. A mere payment without a settlement clause may trigger new discussions as to which claims have been settled. In complex business relationships, therefore, indemnification, settlement, confidentiality and the treatment of security should be included in the settlement documentation.

Limitation periods and parallel claims

An action for a negative declaration serves primarily as a defence. However, it does not automatically suspend the limitation period for the claimant’s own claims for payment, damages or restitution. Anyone who, in addition to mounting a defence, also has counter-claims must examine the limitation periods for these separately and, where necessary, safeguard them by means of an action for performance, a counter-claim or other legally appropriate measures.

Nor may the claimant rely on the fact that the action for a declaratory judgement brought against them protects their claim in every respect under the law on limitation periods. Whether and to what extent lis pendens or a counterclaim is required depends on the specific procedural circumstances. As a precaution, the defendant will often pursue the alleged claim by way of a counterclaim.

Particular care is required in cases involving set-off. A declaration that a principal claim does not exist does not automatically settle all independent counter-claims. Conversely, a claim raised for set-off in the proceedings may acquire the force of res judicata. Claims, defences and counter-claims should therefore be developed as part of an overall strategy.

When bringing a claim makes strategic sense

A negative declaratory action is advisable if the outstanding debt is placing a concrete burden on the company, the company’s legal position is sound, and a prompt resolution in court is of economic value. This may be the case, for example, prior to a corporate acquisition, a financing arrangement, an annual audit, or in the event of an imminent claim arising from security.

It can also offer advantages in terms of timing and preparation. The claimant does not wait for the opposing party to bring a claim that would be unfavourable to them, but instead compiles documents and arguments in a structured manner. However, this does not allow them to choose any place of jurisdiction they wish, as jurisdiction agreements and statutory places of jurisdiction remain decisive.

Restraint is advisable if the facts have not yet been established, crucial evidence is missing, or the other party has so far only communicated in a non-binding manner. A claim may escalate the conflict, accelerate a claim for performance by the other party, and narrow the scope for a settlement. In some cases, a letter of rejection from a solicitor setting a deadline for the binding waiver of claims achieves the desired outcome more quickly and cost-effectively.

The decision should therefore not be made solely out of a desire to ‘turn the tables’. It is an investment decision involving litigation risk. Factors to be weighed up include the amount of the claim, the likelihood of success, the burden of proof, the prospects of enforcement, the business relationship and the reputational consequences.