Declaration of War is an event that takes place during the Phantom Lord arc.
After returning from their job on Galuna Island, Natsu, Happy, Lucy, Gray and Erza arrive in Magnolia town. While walking back to their guild, the group hears whispers from the nearby onlookers about something concerning their guild, which begins to cause anxiety among them. As they arrive, the group looks at their building, horrified due to immense damage having been inflicted upon it. As they question the culprit behind the attack, Mirajane appears and tells them that the attack was carried out by the Phantom Lord Guild. Due to the attack, Fairy Tail's daily activities have been moved into the basement. As the group arrives, they hear many of their guild-mates thinking about getting revenge on Phantom Lord for their actions, though others are more cautious about taking such action.
As Master Makarov greets the group, Natsu immediately gets angry over his happy attitude. Recalling that they went on an S-Class mission without permission, Makarov hits Natsu, Gray and Happy on the head and spanks Lucy on the rear. This enrages Natsu even more, telling Makarov to realize what Phantom Lord did. However, Makarov shrugs off the issue, stating that they're cowards who attacked at night when nobody was there and that they shouldn't be taken seriously. Despite Natsu protesting, Makarov claims that they will not retaliate as he heads off to use the restroom. Mirajane tells Natsu that the master is worried as well, but that inter-guild warfare is forbidden by the Magic Council. As a result, Erza tells the group they will abide by Makarov's decision.
While walking home with Plue, Lucy confers to her Celestial Spirit that she didn't know at first whether to join Phantom Lord or Fairy Tail, but is ultimately glad to have chosen the latter. Remarking on the greatness of the guild while entering her house, Lucy is surprised to see her friends there, making themselves at home. The group states that due to the attack, Phantom Lord likely has their addresses and it was suggested that they remain together to be safe, which they decided to do in Lucy's apartment.
As Lucy wonders why Phantom Lord attacked them, Erza states that this was the first time such an event occurred, although the two guilds have never been on good terms. Natsu comments on Makarov being scared, though Gray dismisses him, citing him as one of the Ten Wizard Saints, which also counts Phantom Lord's Master Jose among its ranks. As Natsu suggests a direct attack, Erza states that the two guilds are evenly matched, with Phantom Lord having the Element 4 as well as Gajeel the Iron Dragon Slayer, the one who attacked the guild.
Later on, in Magnolia's South Gate Park, the Mages make their way through the crowd to the large tree. As they get closer and reach the tree, they see Shadow Gear members Levy, Jet and Droy. The trio is heavily injured and pinned to the tree by iron restraints, with Levy's stomach branded with the symbol of the Phantom Lord Guild. As the Mages seethe, Makarov appears, stating that while he let them get away with destroying their building, the attack on his "children" will not be tolerated, for which he angrily declares war on Phantom Lord.
As Lucy, assigned to look over the injured members in the hospital, thinks back to the first time she met Levy as well as the promise she made to her, she comes to the point of tears, claiming she won't forgive Phantom Lord. Meanwhile, as the Phantom Lord Mages celebrate Gajeel's attack on Fairy Tail, the entrance to their guild building is suddenly broken down. As the dust clears, it is shown that it was done by Natsu, who arrived with the rest of the guild to exact vengeance.