Declaratory Judgements

A declaratory judgment is a judicial proceeding to declare rights of parties who disagree about their obligations.  The disagreement often arises from the terms of a written agreement, but can also arise under a statute or other obligations imposed by law. 

Declaratory judgments allow the court to decide who is right before money damages are lost--as long as there is a legitimate disagreement between the parties. So, for example, if Company A and Company B disagree over whether Company B has to continue selling Company A’s widgets under a contract, one or the other of those companies can go to court to ask it to declare whether Company B has to continue to sell the widgets. This determination can be made while Company B continues its sales efforts and, thus, before Company A sustains the losses that would occur if Company B stopped selling them.  In this way, Company B will not sustain a money damages award against it even if it has wrongly interpreted the contract.

Declaratory judgments are frequently used to decide insurance coverage disputes.  To take a simple example, Person A and Person B get into an automobile accident and B charges A with intentionally crashing into her car.  A’s insurance company might attempt to deny covering the cost of defending or even paying any judgment from B’s lawsuit, putting A’s personal assets (e.g., house and/or savings) at risk.  A can seek a declaratory judgment stating that the insurance company must defend and indemnify him from the lawsuit filed by B.  As you might imagine, when there are multiple insurance policies covering or claimed to cover the same risk, declaratory judgment actions can become complicated.

When parties are unclear about the terms of a statute, declaratory judgments can be a useful tool to obtain a judicial decision before any actions are taken in reliance upon one or another interpretation of it.  In one case, we filed a declaratory judgment action to ensure that a planned shopping center development did not violate any state statute.  We filed a declaratory judgment action, the issue was briefed and argued, and the development was approved pursuant to a judge’s decision.  Absent an appeal, the judge’s decision became the law of the case and could not be attacked at a later date after our client had spent millions of dollars to build the center. 

You can see that, depending on which side you are on, it might be useful to file a declaratory judgment action to determine whether documents were trade secrets or whether a restrictive covenant in an employment agreement was enforceable.   The number of potential applications is vast:  declaratory judgments can arise under almost any contract and in a wide variety of other business dealings in the absence of a contract. Declaratory judgments have another advantage.  They get decided faster than an average lawsuit.   

Are there any disadvantages to declaratory judgments?  Under some case decisions, because the court is only declaring rights, a supplemental proceeding is necessary to enforce those rights.  This disadvantage is more theoretical than real, however, because a party that fails to adhere to a decision that the court has litigated will incur the wrath of the court and a supplementary enforcement proceeding would follow in very short order.  Often injunctions are requested along with declaratory judgments so that the court can declare the rights of the parties and order an injunction to enforce those rights at the same time. 

Some people perceive a disadvantage of declaratory judgments in that they depend upon a ruling by a Judge; there is no jury trial in declaratory judgment actions. (Similarly, there is no right to a jury trial in injunction actions.) Whether this is a real disadvantage or not depends upon the judge involved; with the vast majority of judges, this is no disadvantage at all.

A final disadvantage lies in the rules that permit declaratory judgments. They apply only when there is an existing controversy between two parties with a stake in the outcome of the controversy.  In some cases, the lawsuit that was designed to get a speedy decision gets bogged down in an argument over whether this remedy could be used at all.  It pays to have a lawyer experienced in declaratory judgments review your case to ensure that a declaratory judgment is available under the rules so that you can avoid arguments over the collateral issue of whether it can be sought. 

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