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Rules in Times of Turmoil

In one case, a debtor — a major company in the construction sector — applied to the court for a settlement hearing, stating: “I will pay — once my debtor has paid me.”

Is this a good idea?

A debtor’s procedurally clever move, intended to delay or avoid fulfilling their obligation, is likely to backfire!

1. “I will pay once my debtor pays me”

Traditionally, a creditor (rather than a debtor) may initiate a court-based settlement procedure when the creditor wishes to avoid costly and protracted litigation, to interrupt the running of the limitation period in respect of its claim, and to give the debtor an opportunity to perform the obligation. Settlement may be more advantageous than litigation, particularly where the parties maintain ongoing commercial or personal relationships and wish to preserve them.

A debtor rarely initiates a settlement attempt. Usually, they try to avoid fulfilling the contract, most often the payment, and play for time. However, a debtor can initiate settlement —for example, to spread the debt into installments, reduce the debt amount, or avoid litigation and additional costs, thereby taking the initiative.

However, sometimes the debtor’s goal is not only to postpone the performance of their obligation but also to block the creditor’s claim—or even avoid it entirely. For instance, when a debtor conditions their payment on receiving payment from their own debtor, a series of questions arise:

Is such a formulation even permissible?

Is it allowed to condition the performance of one’s obligation on an event not provided for in the underlying contract, especially on a future and uncertain event?

Is it permissible to transfer one’s own contractual risk under a contract with a third party to the creditor through a settlement approved by the court?

Does this kind of debtor activity effectively block the creditor from pursuing their claim?

2. Does a settlement attempt give rise to lis pendens?

The Polish Code of Civil Procedure does not contain a provision explicitly prohibiting a creditor from bringing an action solely because the debtor has previously applied for a court-based settlement procedure. Therefore, it must be clarified whether a debtor’s initiative in applying for a settlement can effectively block the creditor from seeking judicial relief.

Article 199 §1 of the Code of Civil Procedure, which regulates the grounds for non-suit, may be considered as relevant. One such ground is lis pendens (the pendency of a case), which precludes the bringing of two proceedings relating to the same claim, giving priority to the first-filed proceeding.

Due to the nature of the settlement proceeding, the effect of bringing an action during the proceeding is debated in legal scholarship.

On one hand, Tadeusz Żyznowski (Judge of the Supreme Court) and Dr. Monika Cichorska (University of Warsaw) argue that it is permissible to file a lawsuit during settlement proceeding —reflecting the procedural specifics and the fact that no one can be forced into a settlement. Filing a lawsuit at this stage should be interpreted as a lack of willingness to settle, prompting the court to terminate the settlement process and proceed to litigation. This arises primarily from the different structure of rules governing litigation, aimed at resolving a dispute, versus settlement proceeding, which only produces a settlement or a record of failure to reach one. Since settlement proceeding does not resolve the dispute and does not have the effect of res judicata, although it may substitute for a judgment as a court-approved settlement (Article 223 §2 of the Code of Civil Procedure), it does not create any procedural obstacle to the simultaneous initiation of an action.

Conversely, Dr. Mateusz Winczura (University of Warsaw) and Prof. Marian Waligórski (Jagiellonian University) argue that conducting a settlement proceeding and litigation simultaneously is impermissible and should result in a non-suit. Winczura’s monograph addresses this issue and cites Supreme Court jurisprudence on the interruption of the limitation period through the initiation of a settlement proceeding (no longer applicable following the 2021 amendment to the Civil Code), forming the basis of his opinion.

3. Abuse of procedural and substantive law, and traps for the debtor

If the creditor receives notice from the court of the settlement proceeding scheduled following the debtor’s application, the debtor may be taking substantial risks. The application must not be merely nominal; it should demonstrate a genuine intent to resolve the dispute.

If the debtor conditions payment on receiving funds from their contractor (without any security), they risk being accused of attempting to delay or evade the obligation, as there is little certainty or likelihood the contractor will ever pay. This is the first trap the debtor sets for themselves.

A settlement proposal dependent on a future and uncertain event should be considered an abuse of procedural law (Art. 4 §1 CPC) and an abuse of the settlement institution itself (Art. 917 Civil Code), as it increases uncertainty between creditor and debtor. It does not ensure performance of the obligation and may effectively waive the creditor’s right to payment if the debtor’s contractor fails to pay.

Consequently, such a proposal does not advance the debtor’s fulfillment of their own obligations. A court should not approve such a settlement proposal, constituting a second trap.

The third trap may be even more far-reaching.

4. Acknowledgment of debt

If the creditor receives notice from the court of the debtor’s settlement proceeding, and the debtor, in their notice, provides a written statement acknowledging the debt, then — if the creditor relies on that statement — the conditions for issuing a payment order under the summary proceedings procedure (Article 485 §1 point 3 of the Code of Civil Procedure) are met. This payment order simultaneously constitutes a security for the creditor’s claim (Article 492 §1 of the Code of Civil Procedure) and is enforceable without the need for a writ of execution. Consequently, the creditor may, even before the payment order becomes final, request the securing of their claim (e.g., by garnishing the debtor’s bank account).

A judgment based on a written acknowledgment of debt provided in a settlement proceeding may be issued more quickly than the settlement proceeding itself is concluded.

Relying on such acknowledgment carries legal risks.

However, neither a debtor’s claim of abuse of rights nor ethical rules preventing lawyers from using information from settlement procee dings should block the creditor from acting.

Only those with “clean hands” can invoke such defenses; our debtor does not qualify. Our debtor does not. One who breaches principles of trust and good faith cannot claim a violation of these principles—nemo auditur propriam turpitudinem allegans.

Therefore, a sham application for a settlement proceeding cannot prevent the creditor from effectively bringing an action, not only because of the debtor’s manifest refusal to settle, but primarily due to fundamental principles of the legal order — for from wrongdoing no rights arise (ex iniuria ius non oritur).

PS: The court issued a payment order based on the acknowledgment of debt included in the nominal  application for a settlement proceeding

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