What is cause of action estoppel?
The common law doctrine of res judicata developed to prevent the re-litigation of matters already decided by the courts. The doctrine is rooted in the principles of finality, consistency, judicial economy, and the integrity of the adjudicative process. Cause of action estoppel is one branch of res judicata (the other being issue estoppel). It specifically bars a party from re-litigating a particular cause of action, for example, breach of contract.
Difficulties arise, however, in determining whether or not a subsequent action is in fact a rehashing of a previously resolved cause of action or constitutes a new, albeit related, action.
The Case: Patrick Street Holdings Ltd. v 11368 NL Inc.
The lower court decisions
The underlying case involved a real estate financing dispute. 11368 NL Inc. owned a heavily encumbered property. In 2016, 11368 defaulted on a $1.875 million mortgage held by Patrick Street Holdings Limited. Patrick Street commenced power of sale proceedings which were temporarily suspended when 11368 granted them a new collateral mortgage of $4 million. Weeks later, Patrick Street reactivated the power of sale proceedings and purchased the property. In the accounting of the sale proceeds, Patrick Street included a $4 million payout for the collateral mortgage, leaving insufficient funds to satisfy subordinate creditors.
Later that same year, two creditors successfully challenged Patrick Street’s accounting, arguing that their claims ranked in priority. The application judge found that the mortgage in question secured up to $4 million and Patrick Street had failed to prove what amount was in fact owing. Patrick Street’s claim for the $4 million was excluded and the judge ordered the other creditors be paid out instead (the “2017 Ruling”).1
In 2019, 11368 filed an application to obtain the residue of the sale proceeds. Patrick Street opposed the application. They argued that, although the court had excluded the $4 million mortgage from the accounting, it was a valid contract that entitled Patrick Street to payment of the residual sale proceeds. 11368 did not explicitly reference the terms “res judicata” or “estoppel” in their pleadings but they asserted that the application judge had decided this issue in the 2017 Ruling where Patrick Street’s arguments had been rejected. The application judge found in favour of 11368 and ordered that Patrick Street was not entitled to any of the residue of sale proceeds (the “2019 Ruling”).2
Patrick Street appealed. This time they advanced a new argument asserting that the sale of the property constituted a default rendering the $4 million payable to Patrick Street. 11368 argued that Patrick Street was barred from re-litigating their entitlement to the money based on res judicata and specifically cause of action estoppel. The Court of Appeal agreed.3
The SCC decision
In a 6-3 split decision, the majority dismissed Patrick Street’s appeal.4 The Court considered two primary issues: (1) could 11368 argue res judicata (specifically cause of action estoppel) given that it had not expressly raised that issue before the application judge, and (2) if so, did cause of action estoppel bar Patrick Street from re-arguing its entitlement to the $4 million payment?
On the first issue, the Court reaffirmed the duty of any party wishing to rely on res judicata to raise it at the earliest opportunity.5 However, the Court clarified that it was not necessary to expressly plead or state that they are relying on the doctrine. It is sufficient to plead and argue the material facts giving rise to the claim of estoppel. The question of whether the doctrine has been appropriately advanced is focused on fairness, particularly, the avoidance of surprise.
11368 had met this obligation when they reproduced the 2017 Ruling and the 2019 Ruling before the applications judge, arguing that Patrick’s Street’s appeal on the issue had already been dismissed.6
The Court then set out the accepted test for cause of action estoppel:
1. there must be a final decision of a court of competent jurisdiction in a prior action;
2. the parties to the subsequent litigation must have been parties to the prior action;
3. the cause of action in the prior action must not be separate and distinct from the cause of action in the subsequent proceeding; and
4. the basis of the cause of action and of the subsequent action must have been argued or could have been argued in the prior action, if the parties had exercised reasonable diligence.7
The application of the first two steps is fairly settled but the Court provided additional guidance on the third and fourth components.
Separate and Distinct
On the third factor, the Court noted that “determining whether a cause of action raised in a prior proceeding is ‘separate and distinct’ necessarily requires an assessment and comparison of the facts in the first action and the subsequent action, given that these facts ‘form the “cause” of the action’”.8 It is not the legal label, conception, or description of the issues that is determinative but rather the facts and relationship between the parties.9
In the case at bar, the facts in the earlier proceedings were not separate and distinct from those raised in the appeal. The facts and the relationships between the parties were the same. Both actions were about the priority and value of the encumbrances, including the mortgage held by Patrick Street.
Reasonable diligence
On the fourth prong of the test, the Court stressed that cause of action estoppel will bar re-litigation of matters that were raised or could have been raised in the prior action with reasonable due diligence.10 This standard sufficiently protects parties from the effects of cause of issue estoppel where they could not reasonably have been expected to raise the issue in the prior proceedings for reasons of fraud, dishonesty, or the discovery of new evidence.11
The Court found that Patrick Street could have (and ought to have) raised its basis for claiming entitlement under the mortgage in the initial proceedings. The argument they attempted to advance on appeal was based on evidence that was available to them at that earlier time. It was simply a different legal theory based on the same facts that could have been advanced in the initial proceeding. The failure to put forward all available arguments at that time was fatal to Patrick Street’s position.12
Key Takeaways
The SCC decision in Patrick Street raises a number of important takeaways for litigants (and potential litigants):
- Res judicata must be raised at the earliest opportunity. It is not necessary to explicitly plead the term res judicata (although doing so would certainly provide clarity), however, the party looking to rely on cause of action estoppel must plead the material facts giving rise to the claim of estoppel. Determining whether or not res judicata has been raised is a fact-specific inquiry that will take into account the substance of the pleadings as well as the record of the procedural history. 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.
- Whether two proceedings involve the same cause of action will depend on the underlying facts rather than the legal label attached to the claim. Litigants should ensure that all viable arguments linked to a factual dispute are raised at the earliest possible opportunity in order to avoid the potential that they may be barred from raising them in the future.
- Cause of action estoppel bars arguments that were made, or could have been made, if the parties had exercised reasonable diligence. The test will not be met in circumstances where fraud, dishonesty, or the discovery of new evidence provides an explanation for why the matter was not raised in the initial proceeding.
- Even where the test is met, judges retain the discretion to not apply the doctrine of cause of action estoppel. This discretion, however, must be construed narrowly and only be applied in exceptional circumstances, namely, where applying it would result in an injustice.
For more information on the issues canvassed in this article, please contact Hilary.
1. Cook v Patrick Street Holdings Ltd., 2017 CanLII 65376 (NL SC).
2. Cook v Patrick Street Holdings Ltd., 2020 NLSC 99.
3. Patrick Street Holdings Limited v 11368 NL Inc., 2024 NLCA 11.
4. Patrick Street Holdings Ltd. v 11368 NL Inc., 2026 SCC 15.
12. At paras. 127-128. The dissenting decisions of Justices Martin, Karakatsanis, and Côté held that the appeal should be allowed and the matter remitted back for a hearing of Patrick’s Street’s claim on its merits.