In the modern world of complex court proceedings, especially those that involve multiple parties, a variety of issues, and discrete court applications that form part of a larger dispute, it can be easy for litigants to lose sight of the need to put their best foot forward and advance all of the arguments available to them. As the Supreme Court of Canada (“SCC”) has recently confirmed, the failure to do so can have dire consequences.

Estoppel, which derives, in part, from a 16th century Anglo-French term meaning to “stop, bar, hinder”, is a branch of the common law doctrine of res judicata that bars a party from relitigating a claim already decided by a competent court. The term estoppel itself comes from a 16th century Anglo-French word meaning to “stop, bar, hinder”, and once it applies, the door is firmly shut.

In a recent 6-3 split decision, the Supreme Court of Canada (SCC) discussed the relevant principles, legal test, and implications of the doctrine of cause of action estoppel. The case Patrick Street Holdings Ltd. v. 11368 NL Inc. [Patrick Street], arose from a real estate power of sale dispute in Newfoundland, but its implications extend well beyond the facts. For litigants and their counsel, the decision is a reminder that putting your best foot forward the first time is not just good strategy. Under Canadian law, failing to do so may be fatal to your claim.

A. Background: A mortgage default, unpaid creditors and a multi-million dollar dispute

The case before the Court in Patrick Street involved related applications arising from the distribution of proceeds from the sale of an encumbered property.

The Respondent, 11368 NL Inc. (“11368”), owned property in a real estate development located in St. John’s, Newfoundland. The property was subject to multiple mortgages and claims.

In 2016, 11368 defaulted on one of the mortgages, which was held by the Appellant, Patrick Street Holdings Limited (“Patrick Street”). As a result of the default, Patrick Street commenced power of sale proceedings over the property, which were briefly suspended when 11368 agreed to provide Patrick Street with a new collateral mortgage of $4 million on the same property.

Shortly afterward, Patrick Street reactivated its power of sale proceedings under the defaulted mortgage and purchased the property. Patrick Street prepared an accounting of the sale, which included allocations to pay out several mortgages held by itself or its affiliates, including its $4 million collateral mortgage, and five directions to pay. According to Patrick Street’s accounting, there were insufficient funds to pay out the remaining claims that ranked after the $4 million mortgage.

B. Previous decisions: How the case travelled through the courts, and why it ended up at the SCC

In 2016, two of the unpaid claimants brought applications challenging Patrick Street’s accounting and sought orders directing Patrick Street to pay out their claims (the “2016 Applications”). 11368 was also named in the 2016 Applications.

The application judge reviewed Patrick Street’s accounting and reduced or excluded a number of Patrick Street’s claims, including five directions to pay and the $4 million collateral mortgage. In the result, the judge granted the 2016 Applications and ordered Patrick Street to pay out the applicants’ claims.

Patrick Street appealed this decision. However, it was ultimately dismissed by the Newfoundland and Labrador Court of Appeal (“NLCA”).

Then, in 2019, 11368 filed an application seeking an order to be paid the residue of the proceeds from the sale of the property (the “2019 Application”). In response, Patrick Street argued that:

  1. although the $4 million collateral mortgage had been disallowed from its accounting in the decisions with respect to the 2016 Applications, it remained a valid and enforceable contract between Patrick Street and 11368; and
  2. although they were both named respondents, the 2016 Applications did not address the substantive issues as between Patrick Street and 11368.

The same application judge heard the 2019 Application. The judge rejected Patrick Street’s arguments, relying on his decision in the 2016 Applications, and ordered that the residue of the sale proceeds be paid to 11368.

Patrick Street appealed this decision; however, it was upheld by the NLCA on the basis that the doctrines of res judicata and abuse of process by relitigation applied so as to bar Patrick Street from relitigating its claim with respect to the $4 million collateral mortgage.

Patrick Street then appealed to the SCC.

SCC decision

The SCC delivered a 6 to 3 split decision. The majority (per Wagner CJ) held that Patrick Street’s appeal should be dismissed. The dissenting decisions of Martin and Karakatsanis JJ, and Cote J, held that the appeal ought to be allowed and the matter remitted back for a hearing of Patrick Street’s claim on its merits.

In the majority’s decision (Rowe, Kasirer, Jamal, O’Bonsawin and Moreau JJ concurring), the Chief Justice began by discussing in detail the history of cause of action estoppel. As part of this discussion he noted, among other things, that:

  • res judicata is one of several common law doctrines — including the doctrine of collateral attack and the doctrine of abuse of process by relitigation — that exist to prevent abuse of the judicial decision-making process;1
  • there are two branches of res judicata: cause of action estoppel and issue estoppel;2
  • res judicata is founded on two overarching principles of public policy: a litigant’s interest in fairness, and society’s interest in the conclusion of disputes and the finality of judicial decisions;3
  • res judicata requires litigants to put their best foot forward to establish the truth of their allegations when first called upon to do so and, in the context of cause of action estoppel specifically, requires a litigant to have advanced all arguments at the first proceeding that it could have had it exercised reasonable diligence;4 and
  • the correctness of a prior decision is not a relevant factor in determining whether res judicata applies to bar relitigation.5

a. Was res judicata raised in the first instance?

Wagner CJ then turned to the first question to be determined as part of the cause of action estoppel analysis – whether 11368 pleaded and raised res judicata at first instance. In doing so, he pointed to the following salient principles:

  • Modern pleadings must contain a statement of the material facts on which a party relies to make out its claim for relief. This approach to pleadings favours the substance of what is pleaded over its form and is aimed at ensuring that parties are not taken by surprise.6
  • Unlike defendants or respondents, a plaintiff or applicant bringing an action or application is not expected to know what defences a defendant or respondent will raise, and whether those defences will give rise to a claim that res judicata applies, when it files its originating process.7
  • The obligation to plead res judicata has been characterized as an obligation to plead it where there is an opportunity to do so. In the context of applications, the question then becomes whether it raised res judicata at the earliest opportunity, even if the only opportunity to do so was at the hearing of the application.8
  • As a matter of evidence, parties pleading res judicata should put both the decision from the prior proceeding, along with any pleadings exchanged, before the court in the subsequent proceeding in which res judicata is raised.9

Applying these principles, Wagner CJ found that 11368 had plead res judicata in its 2019 application, as follows:10

  1. Patrick Street’s appeal arose from an interlocutory application in which 11368 and Patrick Street exchanged only one set of pleadings. As the applicant, 11368 would not have been required to anticipate in its pleadings what Patrick Street would respond to its application. Nevertheless, a review of 11368’s application revealed that it pleaded the material facts giving rise to its claim that res judicata Specifically:11
    1. it reproduced the application judge’s decision on which claims he retained (and, necessarily, those he excluded) from Patrick Street’s initial accounting, along with their priority;
    2. it noted that Patrick Street’s appeal of the 2016 Applications had been dismissed; and
    3. it appended both the 2017 decision of the application judge and the 2019 decision of the NLCA to its pleadings
  2. Patrick Street must have understood 11368’s argument that the claims entitled to be paid from the sale proceeds had already been decided as it had argued several times in its written response to 11368 that the application judge and the NLCA did not deal with the situation between Patrick Street and 11368. The implication of this submission was that res judicata did not apply because the application judge had not exhaustively reviewed the accounting in the 2017 decision. Patrick Street also argued that the $4 million mortgage remained “a valid contract and agreement” between itself and 11368, being essentially a reassertion of its claim for entitlement to payment under the $4 million mortgage.12
  3. The obligation to plead res judicata is functional, with the parties being required only to plead the relevant facts supporting the doctrine. Therefore, the fact that 11368 did not plead the doctrine of res judicata or cause of action estoppel specifically in the first instance was neither determinative nor fatal to its argument.13

b. Did cause of action estoppel apply?

The four-part test for cause of action estoppel – applied

Having answered the first question in the affirmative, Wagner CJ then turned to the second question to be determined – whether cause of action estoppel applied in the circumstances before the Court. He answered the question in the affirmative, agreeing with the conclusion of the majority of the NLCA.14

After a thorough discussion of the history of cause of action estoppel,15 Wagner CJ noted that there are four requirements to be met in order to establish that cause of action estoppel applies to a given situation:16

  1. There is a final decision of a court of competent jurisdiction in the prior action;
  2. The parties to the subsequent litigation were parties to or in privy with parties to the prior action;
  3. The cause of action in the prior action is not separate and distinct; and
  4. The basis of the cause of action and the subsequent action was argued or could have been argued in the prior action if the parties had exercised reasonable diligence.

He explained that courts maintain a limited discretion to decline to apply cause of action estoppel where the preconditions to apply the doctrine are otherwise met but where applying it would cause an injustice.17 He added that, in his assessment, the discretion to decline to apply cause of action estoppel should be exercised only exceptionally and is narrower than the discretion to decline to apply issue estoppel (on the basis that (i) the considerations that might justify exercising the discretion to decline to apply issue estoppel are often captured by the fourth prong of the test for cause of action estoppel, and (ii) cause of action estoppel is a more encompassing doctrine than issue estoppel because it precludes the relitigation of an entire cause of action instead of a single issue).18

Applying these principles to the dispute before the Court, Wagner CJ found that:

  1. The decision of the application judge on the 2016 Applications was a final decision of a court of competent jurisdiction (it should be noted that Patrick Street did not dispute that this requirement was met).19
  2. The parties to the 2019 Application were parties to the 2016 Applications. In particular, he found that mutuality between the parties existed notwithstanding that Patrick Street was a respondent in both sets of applications, whereas 11368 was a respondent in one and an applicant in the other.20 Wagner CJ then added that the primary concern at this stage of the test is ensuring that a party is not bound to an outcome it did not have a reasonable chance to advocate for in the same capacity as the one in which it is estopped.21
  3. The cause of action in the 2019 Application was not separate and distinct from the cause of action in the 2016 Applications.22 On this branch of the test he pointed to the following:
    1. In the 2016 Applications, Patrick Street needed to demonstrate that the claims it included in its accounting were properly valued, included and given priority in the distribution. As such, the validity, value, and priority of the registered claims on the property formed the subject matter of the 2016 Applications.23
    2. Patrick Street and 11368 were adverse in interest in both sets of applications. He specifically pointed to the fact that it was in Patrick Street’s interest to defend the claims it set out in its accounting because it or one of its affiliates held most of these claims and was, therefore, not a passive observer or limited participant in the 2016 Applications.24
    3. The 2019 Application arose out of the same facts and subject matter, and the relationship between Patrick Street and 11368 (in which they were adverse in interest) was unchanged.25
    4. The causes of action in the two sets of proceedings — namely, establishing the validity, value, and priority of the encumbrances on the property — were identical. As was what Patrick Street needed to demonstrate in order to defend against the claims of the other encumbrancers, as well as 11368.26
    5. In bringing the 2019 Application, 11368 could rely entirely on the application judge’s findings in the 2016 Applications and on the fact that those findings were upheld on appeal. Similarly, in arguing in the 2019 Application that it was entitled to payment under the $4 million mortgage, Patrick Street was in substance relitigating the findings in the 2016 Applications.27
    6. The proceedings in 2016 and in 2019 both required a judicial determination of the validity, value, and priority of the encumbrances on the property. In both sets of applications, the material facts Patrick Street needed to establish to defend against the claim were the same. And in both sets of applications, 11368 and Patrick Street were adverse in interest. The subject matter of the proceedings and the relationship between the parties were the same in the 2016 and 2019 applications.28
  4. Patrick Street should have argued the basis of its defence to the 2019 Application (which he described as the theory supporting its accounting and, as such, its entitlement to payment under its collateral mortgage) in 2016.29

Having established that the four-part test for cause of action estoppel was satisfied, Wagner CJ then found that this was not an appropriate case to exercise the court’s discretion not to apply cause of action estoppel. In this respect he noted that in the 2016 Applications, all parties presented arguments respecting the validity, value, and priority of the encumbrances on the property, including specifically the $4 million mortgage. He added that Patrick Street was well aware that its claim for entitlement to payment under the $4 million mortgage was challenged by the other parties and had the opportunity in 2016 to fully litigate the matter.30

In discussing the exercise of discretion, he also noted that:

  • There was no concern in the matter before the court in terms of applying res judicata in the context of applications. The 2016 Applications were commenced under s. 11 of the Conveyancing Act, which allows an encumbrancer to challenge a mortgagee’s accounting of the proceeds from a power of sale and put into issue the entirety of Patrick Street’s accounting – including the validity, value, and priority of each of the claims.31
  • The amount of the sale proceeds theoretically tied up in the claims Patrick Street asserted in its accounting were not relevant as it had not proven any of these claims at the outset of the 2016 Applications, and the validity, the value, and the priority of each encumbrance on the property (including the collateral mortgage) were all put into issue during the 2016 Applications.32

C. What this means for you: Four things every litigant should know after Patrick Street

The SCC decision in Patrick Street is both substantial and nuanced. This article is intended to provide an overview of the decision and to highlight salient aspects of the Court’s reasoning.

For litigants (and potential litigants) some important takeaways flowing from the SCC’s decision are the following:

  1. Cause of action estoppel is a legal doctrine that exists to prevent the same claim from being asserted in separate court proceedings. Importantly, it applies equally to claimants and defendants.
  2. Cause of action estoppel involves the application of a four-part test. These elements, themselves, will necessarily depend on the fact-specific nature of the inquiry as confirmed by the difference between the majority decision and Cote J.’s dissent on the third prong.
  3. Res judicata must be raised by the party seeking to rely on it at the earliest opportunity (although Martin and Karakatsanis JJ.’s dissent proposes that raising it on appeal could be viable). In any event, this requirement can give rise to a number of questions depending on the facts of the matter. The obligation to plead res judicata will be met where the material facts giving rise to the claim of estoppel have been pleaded – there is no need to explicitly use the term “res judicata” (although using the term in one’s pleadings is likely to reduce the risk of a party asserting that it was not plead).Determining whether res judicata has been raised is a functional and highly fact-specific inquiry that involves looking at the substance of the pleadings and the record of proceedings in order to assess.
  4. Judges have a residual discretion not to apply the doctrine of cause of action estoppel even if the test is met. The majority decision is clear authority that this discretion is to be construed narrowly and only applied in exceptional circumstances. However, Cote J.’s dissent suggests that where the result of the doctrine would work a substantial injustice then the discretion may be exercised to prevent it.

Conclusion

Patrick Street sends a clear message: Failing to fully and properly advance an argument available to you, even on an interlocutory application before trial, may prevent you from doing so later. Cause of action estoppel is not frequently discussed but it is an important legal principle with serious (and potentially very expensive) implications. Whether you are preparing for, or already involved in, legal proceedings, it is recommended that you consult with a lawyer to ensure that you do not unintentionally expose your claim to challenge on the basis of cause of action estoppel.

If you have concerns about res judicata or cause of action estoppel, the Commercial Litigation lawyers at Miller Thomson can help you assess your options and develop a plan.

  1. Patrick Street, supra, at para. 32 ↩︎
  2. Patrick Street, supra, at para. 33 ↩︎
  3. Patrick Street, supra, at para. 36 ↩︎
  4. Patrick Street, supra, at para. 39 ↩︎
  5. Patrick Street, supra, at para. 40 ↩︎
  6. Patrick Street, supra, at para. 47 ↩︎
  7. Patrick Street, supra, at para. 51 ↩︎
  8. Patrick Street, supra, at para. 52 ↩︎
  9. Patrick Street, supra, at para. 53 ↩︎
  10. Patrick Street, supra, at para. 54 ↩︎
  11. Patrick Street, supra, at para. 55 ↩︎
  12. Patrick Street, supra, at para. 56 ↩︎
  13. Patrick Street, supra, at para. 57 ↩︎
  14. Patrick Street, supra, at para. 65 ↩︎
  15. Patrick Street, supra, at paras. 66-69 ↩︎
  16. Patrick Street, supra, at para. 70-77 ↩︎
  17. Patrick Street, supra, at para. 87 ↩︎
  18. Patrick Street, supra, at para. 89 ↩︎
  19. Patrick Street, supra, at paras. 97-98 ↩︎
  20. Patrick Street, supra, at para. 100 ↩︎
  21. Patrick Street, supra, at para. 102 ↩︎
  22. Patrick Street, supra, at paras. 103-123 ↩︎
  23. Patrick Street, supra, at para. 107 ↩︎
  24. Patrick Street, supra, at para. 108 ↩︎
  25. Patrick Street, supra, at para. 109 ↩︎
  26. Patrick Street, supra, at para. 110 ↩︎
  27. Patrick Street, supra, at para. 114 ↩︎
  28. Patrick Street, supra, at para. 115 ↩︎
  29. Patrick Street, supra, at paras. 124-128 ↩︎
  30. Patrick Street, supra, at para. 129 ↩︎
  31. Patrick Street, supra, at para. 130 ↩︎
  32. Patrick Street, supra, at para. 133 ↩︎