Is it permissible to grant security for a declaratory action (Article 189 of the Code of Civil Procedure) in every case?

The Law Firm’s lawyers represented the Client (an investor) in security proceedings initiated by the contractor prior to bringing an action for a declaratory judgment that there was no obligation to pay contractual penalties demanded by the investor from the contractor.

The court of first instance granted the contractor’s request and secured the claim, regulating the rights and obligations of the parties for the duration of the proceedings by:

• prohibiting the client from submitting a request to the insurer for the payment of any funds from the performance bond, removal of defects and faults on account of contractual penalties,
• prohibiting the Client from making statements about deducting these contractual penalties from any claims the contractor has against the Client,
• prohibiting the Client from taking any other actions that would aim to satisfy these contractual penalties,

with the proviso that taking such actions before the date of filing the application for security or before the decision is issued is ineffective against the contractor and the person against whom the actions were taken by the Client.

The contractor filed a claim with the court of first instance within the prescribed time limit to determine the non-existence of the obligation to pay contractual penalties.

Acting on behalf of the Client, the Law Firm’s lawyers lodged an appeal against the decision on security with the Court of Second Instance, which amended the contested decision by dismissing the contractor’s application.

It should be noted that the Client brought an action against the contractor for payment of contractual penalties, on the same grounds and in the same amount as resulted from the decision on granting security and from the contractor’s claim for a declaration that there was no obligation to pay contractual penalties.

In the justification of the decision, the Court of Second Instance agreed with the arguments of the Law Firm’s attorneys and advocates and stated that the contractor had not substantiated its claim and had not demonstrated a legal interest.

The court of second instance emphasised, among other things, that:

• in order to effectively invoke a legal interest in a request to determine specific content, it is necessary to demonstrate that the expected decision will have such effects on the relations between the parties as a result of which their legal situation will be clearly defined and thus the risk of future infringement of the claimant’s rights, resulting from the erroneous belief that the claimant is entitled to certain rights, will be eliminated;
• There is also no legal interest in formulating a claim for a declaratory judgment when the legal uncertainty can be removed by fully clarifying the legal situation of the party seeking the declaration by way of a defence in separate proceedings for performance.

In the case described, thanks to the extensive legal arguments of the Law Firm’s lawyers, the contractor’s application for security was dismissed.