A Texas Court of Appeals Weighs In On The Defensive Use of The Uniform Declaratory Judgment Act

For plaintiffs, filing a claim for breach of contract and seeking a declaratory judgment almost always go hand in hand. What happens, however, when a party threatened with such claims beats the plaintiff to the punch and files its own declaratory judgment suit on the same contract? The Fourteenth Court of Appeals has recently blessed such approach in Drexel Corp. v. Edgewood Development, Ltd., as long as certain conditions are met.

In this case, Drexel Corporation and Edgewood Development entered into a written contract in which Edgewood promised to pay Drexel a portion of the proceeds when a certain property was sold. Seventeen years later, Drexel sent Edgewood a demand letter in which it stated that the parties omitted to include in the contract a date by which the property would be sold and final payment made to Drexel. The demand letter stated that a reasonable time for the property’s sale had passed and that a reasonable estimation of Drexel’s share of the proceeds from a hypothetical sale was $1.2 million. If Edgewood did not pay $1.2 million within thirty days, Drexel would sue for “a declaratory judgment with respect to the missing term (i.e., the outside date for a sale of the property) and a monetary judgment” for Drexel’s share of the sales proceeds, plus attorneys’ fees, costs, and interest.

In response to the letter and before the 30-day deadline expired, Edgewood filed its own suit for declaratory judgment under the Uniform Declaratory Judgment Act (“UDJA”). See Tex. Civ. Prac. & Rem. Code Ann. § 37.004(a). Drexel moved to dismiss the suit for lack of subject matter jurisdiction arguing that: (1) the controversy was not ripe since Edgewood did not plead or prove that it would suffer any imminent injury or harm without the judicial declaration; and (2) the UDJA should not be used “to deprive the real plaintiff of the traditional right to choose the time and place of suit.” The Court of Appeals affirmed the trial court’s subject-matter jurisdiction rejecting both arguments.

Requirement No. 1: Justiciable Controversy

Under the UDJA, a person interested under a written contract or whose rights are affected by it “may have determined any question of construction or validity arising under the . . . contract.” Tex. Civ. Prac. & Rem. Code Ann. § 37.004(a). A court may construe the contract “either before or after there has been a breach.” Id. § 37.004(b). According to the Court of Appeals, a declaratory judgment under the UDJA is appropriate only if “a justiciable controversy exists as to the rights and status of the parties and the controversy will be resolved by the declaration sought,” and the Act cannot be used to resolve a hypothetical or contingent situation. Since Drexel asserted in the demand letter that Edgewood was obligated to pay $1.2 million under the contract and Edgewood denied that obligation, there was a justiciable controversy between the parties.

Requirement No. 2: Ripeness

In addition to the justiciable controversy requirement, the parties’ dispute must be ripe for adjudication. To evaluate the ripeness of a claim, courts will consider “whether, at the time a lawsuit is filed, the facts are sufficiently developed ‘so that an injury has occurred or is likely to occur, rather than being contingent or remote.’” The threat of harm “can constitute a concrete injury, but [it] must be ‘direct and immediate’ rather than conjectural, hypothetical, or remote. To show that such injuries are likely to occur, for example, parties must demonstrate that the harm is imminent, but has not yet impacted them.” Pursuant to this standard, because Drexel made a demand for payment under the contract, the declaratory judgment by Edgewood called not for an advisory opinion upon a hypothetical basis, but for an adjudication of its rights and obligations under the parties’ agreement, making the parties’ dispute ripe for adjudication.

Thus, as long as a party can establish the above requirements, it can seek a declaration of contractual non-liability in response to a demand made under a contract by another party.  The Court of Appeals specifically rejected Drexel’s argument that Edgewood’s filing of a declaratory judgment lawsuit deprived the “real” plaintiff of its “traditional right to choose the time and place of suit.”  It explained that while this principle might apply to tort claims, it has no application in a contractual dispute because “only a plaintiff may seek redress for a tort. But in a contract case, either party may breach the agreement and either party may sue for a breach or a judicial determination of rights under the contract.” Thus, since both parties might have suffered damages in a contract situation, there is no “real” plaintiff.

PRACTICAL IMPLICATIONS:  When considering how to respond to a demand under a contract, a potential defendant should consider the pros and cons of filing its own declaratory judgment suit instead of waiting for the plaintiff to act on its threat.  Filing such a suit can create a certain strategic advantage since it allows the party to pick the court and the venue for filing, control the posture of the suit, and frame the facts and issues for the court.

On the other side, unless a potential plaintiff thinks that the demand letter will succeed in persuading the other party to fulfill its contractual obligations, it might want to hold off on making the presentment under Tex. Civ. Prac. & Rem. Code § 38.002 until after it files the suit so as to not tip off the other side and allow it time to file its own suit under the UDJA.

For more information regarding contract disputes in Texas, contact Leiza Dolghih.

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