The court outlined two prongs of the test for the first time in a split decision on Friday
In a split decision on Friday, the Supreme Court of Canada explicitly outlined the four criteria that a matter must meet for a court to apply cause of action estoppel, a legal doctrine, to prevent relitigation.
While the SCC has explained the first two criteria in previous decisions, the court has never before outlined the parameters of the third and fourth criteria.
The high court clarified that when a case meets all four criteria, courts still maintain a narrow discretion to allow a party to relitigate their case anyway, if preventing them from doing so would result in injustice.
Cause of action estoppel is a branch of res judicata, a common law doctrine that prevents parties from abusing the judicial system by relitigating issues that have already been decided in court. Cause of action estoppel specifically bars parties from relitigating a cause of action – such as breach of contract – in pursuit of a remedy.
Unlike with issue estoppel, the other branch of res judicata, cause of action estoppel prevents the relitigation of a cause of action by either party, the SCC said.
Writing for the majority in Patrick Street Holdings Ltd. v. 11368 NL Inc., SCC Chief Justice Richard Wagner found that the Court of Appeal of Newfoundland and Labrador was correct when it barred a mortgage lender from trying to use the courts to recoup $4 million from a borrower, even though the issue had already been decided in a separate case. Wagner said the lender’s attempt satisfied all four criteria of the cause of action estoppel test.
Wagner also found that, in this case, it would not be appropriate for the courts to exercise their discretion to allow the lender to relitigate the case anyway, since there is no evidence that the lender had been subject to any procedural unfairness.
Justice Sheilah Martin wrote a dissent and was joined by Justice Andromache Karakatsanis. Justice Suzanne Côté wrote a separate dissent.
The borrower in this case is 11368 NL Inc., a company that owned a property with several mortgages. In 2016, the company defaulted on a mortgage held by Patrick Street Holdings Ltd., prompting Patrick Street Holdings Ltd. to initiate power-of-sale proceedings. Those proceedings were suspended after the company agreed to provide Patrick Street with a new $4 million collateral mortgage on the property.
Weeks later, Patrick Street restarted the proceedings under the defaulted mortgage and bought the property. As the lender, Patrick Street then outlined how the sale proceeds should be divided among creditors, and included a claim by Patrick Street to the new $4 million mortgage.
In 2016, two other creditors challenged Patrick Street’s plan for dividing the proceeds from the sale. The court excluded several claims from the plan, including Patrick Street's $4 million mortgage claim. The Court of Appeal of Newfoundland and Labrador upheld the court’s ruling.
In 2019, 11368 filed an application asking for any residual proceeds from the sale of the property. Patrick Street responded by arguing that it was still entitled to the $4 million and that the 2016 proceedings never addressed the “situation” between it and 11368. A court rejected Patrick Street’s argument and ordered that the remaining proceeds go to 11368. Once again, the Court of Appeal upheld the ruling, and Patrick Street appealed to the SCC.
11368 argued that Patrick Street was barred by res judicata from relitigating a matter that the first court case had already resolved. However, Patrick Street said the company raised this argument for the first time before the Court of Appeal, when it should have raised it before the case went to the appellate stage.
The majority dismissed Patrick Street’s appeal, ruling that 11368 had adequately pleaded res judicata before the application judge in 2019. The SCC then had to decide whether cause of action estoppel prevented Patrick Street from relitigating its claims.
Wagner referenced Grandview v. Doering, a 1975 SCC decision that he called “the leading authority from this court on cause of action estoppel.” That decision held that the legal doctrine prevents relitigation of a cause of action that is neither separate nor distinct from one raised in a prior proceeding. While Grandview did not outline a formal test for determining whether cause of action estoppel applies, courts interpreting the decision over the past 50 years have identified four prongs.
Two of those prongs – which stipulate that there must be a final decision on the matter issued by a court, and that the parties to the subsequent litigation were parties to, or working with the parties to, the prior action – have been addressed in court decisions over the years, Wagner said.
However, the justice said that the third and fourth prongs – which require that the cause of action in the previous action is not separate and distinct, and that the basis of the cause of action and the subsequent action were argued or could have been argued in the prior action if the parties had exercised reasonable diligence – “merit additional explanation.”
“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,”’ Wagner wrote.
With respect to the fourth prong, Wagner explains that the “basis of a cause of action can be understood as the theory that explains how the cause of action – that is, the set of facts – entitles a party to relief.”
He continues, “As the fourth prong of the test was initially conceptualized, cause of action estoppel would bar the relitigation of any matters that were raised or could have been raised with reasonable diligence in the prior proceeding.
Wagner said that in his view, “the reasonable diligence qualifier is sufficient to ensure that litigants are not held to an unrealistic standard and ultimately barred from raising an argument in a second proceeding that they could not have reasonably been expected to raise in the prior proceeding.” For example, the justice said, the reasonable diligence qualifier will prevent courts from applying cause of action estoppel in cases where fraud, dishonesty, or the discovery of new evidence explains why a party failed to raise an issue in a prior proceeding.
In Martin’s dissent, the justice found that 11368 did not raise res judicata before the application judge, but it may do so on appeal.
Côté said she would have allowed Patrick’s appeal.
Counsel for the parties did not respond to requests for comment.
