Civil Litigation/Mortgages: Res Judicata; Cause of Action Estoppel
Patrick Street Holdings Ltd. v. 11368 NL Inc., 2024 NLCA 11, 2026 SCC 15 (41296)
“11368 NL Inc. owned property that was encumbered by numerous mortgages and other claims. In 2016, 11368 defaulted on a mortgage held by Patrick Street Holdings Limited. Patrick Street commenced power of sale proceedings, which were suspended when 11368 agreed to provide Patrick Street with a new collateral mortgage of $4 million on the property. Several weeks later, Patrick Street reactivated power of sale proceedings under the defaulted mortgage and purchased the property. As the mortgagee, Patrick Street prepared an accounting regarding the sale, in which it set out allocations to pay out several of the mortgages on the property that it or its affiliates held, including $4 million to pay out its new collateral mortgage. There were insufficient proceeds to pay out other encumbrancers’ claims that ranked after the $4 million mortgage.
In 2016, two encumbrancers commenced applications to challenge Patrick Street’s accounting, and sought orders directing Patrick Street to pay out their claims (“2016 applications”). Patrick Street, as mortgagee, and 11368, as mortgagor, were listed as respondents. The application judge granted the applications. He reviewed the claims Patrick Street included in and excluded from its accounting and reduced the amount Patrick Street claimed on several mortgages, excluded the $4 million mortgage from the accounting, and ordered Patrick Street to pay out the two encumbrancers’ claims. The Court of Appeal dismissed Patrick Street’s appeal.
In 2019, 11368 filed an application seeking an order to be paid the residue of the proceeds from the sale of the property (“2019 application”). In response, Patrick Street asserted that, while the $4 million mortgage was disallowed from the accounting in the 2016 applications, it remained a valid contract between Patrick Street and 11368. Further, Patrick Street argued that the 2016 applications did not deal with the situation as between Patrick Street and 11368. The same application judge rejected Patrick Street’s argument, relying on his decision in the 2016 applications to do so, and ordered that the residue of the sale proceeds be paid to 11368. The Court of Appeal upheld this decision, finding that the doctrine of res judicata had been properly raised by 11368 before the application judge and that this doctrine, along with the doctrine of abuse of process by relitigation, applied so as to bar Patrick Street from relitigating its claim under the $4 million mortgage.”
The SCC (6:3) dismissed the appeal.
The Chief Justice wrote as follows (at paras. 5-7, 39-43, 53, 77, 134):
“…the majority of the Court of Appeal was correct to uphold the application judge’s decision on the 2019 application. This Court has long recognized an obligation on parties to plead and raise res judicata at first instance (Davies v. McMillan (1892), Cameron 306 (S.C.C.), at p. 317; Cooper v. The Molsons Bank (1896), 26 S.C.R. 611, at p. 620). 11368 satisfied this obligation, properly pleading res judicata in its written submissions and raising the doctrine before the application judge in 2019.
Moreover, the majority of the Court of Appeal was correct to conclude that cause of action estoppel precludes Patrick Street from challenging the application judge’s original decision on Patrick Street’s accounting by raising a new argument to support its claim for entitlement to payment under the $4 million mortgage. The cause of action at issue in the 2016 proceedings concerned the need to determine the validity, value, and priority of encumbrances on the property through a judicial accounting. This is the same cause of action that was at issue in 11368’s 2019 application. Accordingly, Patrick Street’s failure in 2016 to advance all reasonably available arguments in defence of its claim for entitlement to be paid from the sale proceeds is fatal to its ability to raise those arguments in defence of this position in 2019.
Because cause of action estoppel provides a full answer to this appeal, it is unnecessary to address 11368’s arguments respecting the applicability of issue estoppel and abuse of process by relitigation to the facts of this case…
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To advance the objective of finality, res judicata “requires litigants to put their best foot forward to establish the truth of their allegations when first called upon to do so” (Danyluk, at para. 18). As I will explain below, in the context of cause of action estoppel, res judicata requires a litigant to have advanced all arguments at the first proceeding that it could have had it exercised reasonable diligence. In this sense, a litigant is entitled only to one kick at the can (para. 18).
Importantly, res judicata advances the objective of finality regardless of the correctness in law or fact of the prior decision that gives rise to the estoppel (Handley, at p. 6). This gives effect to the principle that a judicial decision made by a competent court is final and conclusive unless corrected on appeal (p. 6). For this reason, the correctness of a prior decision is not a relevant factor in determining whether res judicata applies to bar relitigation.
While not its primary purpose, res judicata performs an additional societal function in facilitating access to justice. It does so by preventing duplicative litigation that drains court resources and the resources of the litigants (Danyluk, at para. 18).
Closely related to the doctrine of res judicata is the doctrine of abuse of process by relitigation. Both res judicata and abuse of process by relitigation advance the policy grounds of finality and fairness (Toronto (City), at para. 38). However, abuse of process “transcends the interests of litigants and focuses on the integrity of the entire system” (Ontario v. O.P.S.E.U., 2003 SCC 64, [2003] 3 S.C.R. 149, at para. 12).
The doctrine of abuse of process derives from a court’s inherent jurisdiction to manage its own procedures, and it applies based on a judge’s appreciation of the impact of relitigation on the repute of the administration of justice. Abuse of process by relitigation is often invoked where the strict preconditions to apply one of the branches of res judicata are not met, but where permitting relitigation of an issue or cause of action would nonetheless constitute a misuse of a court’s procedures (Toronto (City), at para. 37). In this sense, while abuse of process is “unencumbered” by the technical requirements of res judicata, it should be applied as a last resort to protect the repute of the administration of justice (para. 37, citing Canam Enterprises Inc. v. Coles (2000), 51 O.R. (3d) 481 (C.A.), at para. 55, per Goudge J.A., dissenting). It is “only when the rules of res judicata run out that it is useful to turn to” the doctrine of abuse of process (A. Zuckerman, Zuckerman on Civil Procedure: Principles of Practice (3rd ed. 2013), at p. 1244).
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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. Both the formal judgment and the pleadings may be relevant indicia of the subject matter of a judicial decision and may assist in illuminating the nature of the cause of action for the purposes of cause of action estoppel (Handley, at p. 106). Further, the fact that a party has put the formal judgment or the pleadings before the subsequent court may support a conclusion that a party pleaded res judicata.
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In summary, then, the test for cause of action estoppel is as follows:
- (a) There is a final decision of a court of competent jurisdiction in the prior action;
- (b) The parties to the subsequent litigation were parties to or in privy with parties to the prior action;
- (c) The cause of action in the prior action is not separate and distinct; and
- (d) 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.
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In summary, cause of action estoppel applies in this case. My conclusion that cause of action estoppel applies is dispositive of this appeal. In view of this, I find it unnecessary to go on to consider the applicability of issue estoppel, along with the question of whether Patrick Street’s efforts at relitigation constitute an abuse of process.”