Executive Summary: Key Legal and Evidentiary Issues

• The central legal question was whether a party must plead and raise res judicata at first instance in order to rely on the doctrine, and whether 11368 NL Inc. had satisfied that obligation in the 2019 application.
• At issue was whether cause of action estoppel barred Patrick Street Holdings Limited from re-arguing its entitlement to payment under a $4 million collateral mortgage already addressed in the 2016 applications decision.
• Evidentiary support for the plea of res judicata included 11368's reproduction of the application judge's list of retained and excluded claims, appending the 2016 application and Court of Appeal decisions to its pleadings, and oral submissions before the application judge.
• Application of the four-pronged cause of action estoppel test required determining finality of the prior decision, identity of parties, identity of the cause of action, and whether the basis of the cause of action could have been argued in the prior action with reasonable diligence.
• Discretion to decline estoppel was considered but rejected, since the 2016 applications were not a small or summary slice of a larger dispute and Patrick Street had a full opportunity to litigate the validity, value, and priority of the $4 million mortgage.
• Costs were sought by 11368 on a solicitor-client basis and personally against Patrick Street's counsel; the Court declined both requests, finding no reprehensible, scandalous, or outrageous conduct and no bad faith on the part of counsel.

Background and parties

The appeal arose from a long-running mortgage enforcement dispute in Newfoundland and Labrador. 11368 NL Inc. owned property in a real estate development called Kenmount Terrace, which was encumbered by numerous mortgages and other claims. Among them, J-3 Consulting and Excavating Ltd. held a mechanic's lien worth roughly $705,000; John Cook held two collateral mortgages collectively worth $225,000; and Deanna Cheeke held a mortgage worth $150,000. Patrick Street Holdings Limited or its affiliates claimed several further encumbrances on the property, including five "directions to pay" directing a total of over $1.1 million from the proceeds of any sale, along with several mortgages.

The defaulted mortgage, the $4 million collateral mortgage, and the sale

One of the mortgages held by Patrick Street was a $1.875 million mortgage securing funds it had advanced to 11368. In early 2016, 11368 defaulted on this mortgage, and Patrick Street commenced power of sale proceedings under s. 5 of the Conveyancing Act. The proceedings were suspended after 11368 agreed to provide Patrick Street with a new collateral mortgage "to the limit of" $4 million on the Kenmount Terrace property, securing 11368's guarantee of an unrelated mortgage worth roughly $10 million held by Patrick Street and its affiliates over other properties. Several weeks later, Patrick Street reactivated the power of sale proceedings under the $1.875 million mortgage and purchased the Kenmount Terrace property at public auction. As mortgagee, Patrick Street was required by s. 10 of the Conveyancing Act to prepare an accounting of the sale. Its accounting allocated payments to several mortgages held by Patrick Street or its affiliates, the five directions to pay, and $4 million to pay out the new collateral mortgage. The result was that there were insufficient proceeds to pay out the claims of J-3, Mr. Cook, and Ms. Cheeke, and no residue.

The 2016 applications and the first appeal

J-3 and Mr. Cook commenced applications under s. 11 of the Conveyancing Act challenging the accounting and seeking orders directing Patrick Street to pay out their claims. Patrick Street, as mortgagee, and 11368, as mortgagor, were both listed as respondents. In 2017 NLTD(G) 167, Handrigan J. granted the applications. He reviewed Patrick Street's accounting, reduced amounts claimed on several mortgages, excluded all five directions to pay as not being "encumbrances" under s. 2 of the Conveyancing Act, and excluded the $4 million collateral mortgage on the basis that Patrick Street had not completed any analysis of the amount, if any, owing under it. He ordered Patrick Street to pay out J-3's claim and Mr. Cook's two collateral mortgages, and made an order for costs. The Court of Appeal of Newfoundland and Labrador dismissed Patrick Street's appeal in 2019 NLCA 69, distinguishing the Nova Scotia decision in Glasswall Ltd. v. 2009861 Nova Scotia Ltd. on the basis that the parties there had agreed on the amount owing under the collateral mortgage, and noting that the registration cost of a mortgage is "not determinative of the amount actually owing under" it. Leave to appeal to the Supreme Court was not sought.

The 2019 application and the second appeal

In 2019, 11368 filed an interlocutory application in the same action, asking the court to order Patrick Street to pay Ms. Cheeke the amount owing under her mortgage plus interest and to direct the residue of the sale proceeds to 11368. 11368's application reproduced the 2017 decision and asserted that, with no further encumbrancers after Ms. Cheeke, it was entitled to the remaining balance. In response, Patrick Street acknowledged that the $4 million mortgage had been disallowed but argued that it remained a valid contract between Patrick Street and 11368 and that the 2017 and 2019 decisions had not dealt with the "situation" between Patrick Street and 11368. In 2020 NLSC 99, Handrigan J. reaffirmed his earlier conclusion that the $4 million mortgage should be disallowed, noted he had been shown nothing to change his mind, and ordered the amount owing under Ms. Cheeke's mortgage paid to her and the residue paid to 11368. On appeal, Patrick Street advanced a new argument that the sale of the property constituted a "legal action" under clause (h) of the $4 million mortgage document, which provided that "in the event of any legal action being taken against the said lands and premises such that the security given herein may be put in jeopardy . . . the entire principal sum and all other monies outstanding under the documents evidencing the indebtedness and hereunder shall, at the option of the Mortgagee, become immediately due and payable." Patrick Street pointed to unchallenged affidavit evidence that the amount outstanding on the guaranteed loan was well over $4 million. In 2024 NLCA 11, a majority of the Court of Appeal (O'Brien and Butler JJ.A.) dismissed the appeal, finding that cause of action estoppel, issue estoppel, and abuse of process by relitigation barred Patrick Street from re-arguing its entitlement, and that 11368 had properly pleaded and raised cause of action estoppel and issue estoppel before the application judge. Hoegg J.A. dissented, finding that the application judge had erred in not finding the $4 million mortgage payable in full upon the sale of the Kenmount Terrace property, that issue estoppel and abuse of process by relitigation could not be raised for the first time on appeal, that neither doctrine was made out even if they could have been raised, and that, even if the preconditions to establish the applicability of these doctrines were met, she would have exercised her discretion to decline their application. She did not address whether cause of action estoppel applied to bar Patrick Street's claim.

Issues before the Supreme Court of Canada

The appeal raised two principal questions: whether a party has an obligation to plead and raise res judicata at first instance in order to rely on the doctrine, and whether Patrick Street was barred by cause of action estoppel from arguing in the 2019 proceeding that it was entitled to payment under the $4 million mortgage.

The relevant statutory framework and the mortgage clause at issue

The case turned in part on the Newfoundland and Labrador Conveyancing Act. Section 10 requires a mortgagee to prepare an accounting of the sale of a mortgaged property and to send a copy to the mortgagor and any other registered encumbrancer or guarantor within 30 days of completion of the sale. Section 11 allows a mortgagor or another registered encumbrancer or guarantor dissatisfied with the accounting to apply to a judge "for whatever relief that the judge may think appropriate." Section 14(3) governs the residue of money received pursuant to a power of sale, directing payment, in order, of costs and expenses, mortgage money, interest and costs, and finally the residue "to the person entitled to the mortgaged property." The substantive contractual provision relied on by Patrick Street was clause (h) of the $4 million collateral mortgage, which made the entire principal sum and other monies outstanding become immediately due and payable, at the mortgagee's option, in the event of any "legal action being taken against the said lands and premises such that the security given herein may be put in jeopardy."

The majority's analysis: obligation to plead and cause of action estoppel

Writing for the majority, Wagner C.J. (with Rowe, Kasirer, Jamal, O'Bonsawin and Moreau JJ. concurring) held that there is a long-recognized obligation on parties to plead and raise res judicata at first instance. The obligation is functional, requiring a party to plead the material facts giving rise to the claim of estoppel so that the responding party has notice of the case it must meet. A party need not explicitly reference the term "res judicata"; the inquiry focuses on whether the pleadings were procedurally fair. The majority found that 11368 had satisfied the obligation, having reproduced the 2017 list of retained and excluded claims with their priority, pleaded that Patrick Street's appeal from that decision had been dismissed, appended both the 2016 application and Court of Appeal decisions to its pleadings, and raised res judicata in oral submissions before the application judge. Patrick Street's own submissions reflected that it was aware of and understood 11368's argument.

Application of the four-pronged test

The majority applied the four requirements for cause of action estoppel: a final decision of a court of competent jurisdiction in a prior action; the parties to the subsequent litigation having been parties to the prior action; the cause of action in the prior action not being separate and distinct from the cause of action in the subsequent proceeding; and the basis of the cause of action in the subsequent action having been argued or capable of being argued in the prior action with reasonable diligence. All four were met. The 2017 decision was final because it was upheld on appeal and leave to appeal was not sought. Patrick Street and 11368 were parties in both proceedings, regardless of their respective positions on the record. The cause of action in both proceedings concerned establishing the validity, value, and priority of the encumbrances on the property through a judicial accounting. With respect to the fourth prong, the majority held that the basis of Patrick Street's claim — the theory supporting its accounting and its entitlement to payment under the $4 million mortgage — could have been argued in the 2016 proceedings, since the supporting evidence was already before the application judge at that time.

Discretion not to apply estoppel

The majority recognized that courts retain a narrow discretion to decline to apply cause of action estoppel where doing so would cause an injustice, such as where procedural unfairness tainted the first proceeding or where summary procedures addressed only a discrete element of a larger dispute. The discretion is to be exercised only exceptionally. The Court concluded that this was not an appropriate case in which to exercise it. In 2016, all parties had presented arguments regarding the validity, value, and priority of the encumbrances. Patrick Street was well aware that its claim under the $4 million mortgage was challenged and had the opportunity to fully litigate the matter. Its failure to do so was not evidence of any procedural unfairness. Given that cause of action estoppel applied, the majority found it unnecessary to address issue estoppel and abuse of process by relitigation.

The dissenting reasons

Martin J. (Karakatsanis J. concurring) would have allowed the appeal, focusing on the question of public importance for which leave had been granted: whether a party can raise res judicata for the first time on appeal. She concluded that there is no bright-line rule preventing a party from doing so, and that an appellate court may consider such a new issue of law where it can do so without procedural prejudice to the opposing party and where refusing to do so would risk an injustice. Applying that test, she would have allowed 11368 to raise res judicata on appeal, given that Patrick Street had not objected to the Court of Appeal considering the doctrine and that refusal would have undercut the policy reasons for the doctrine and risked undermining a final decision. However, even if the test for res judicata were satisfied, she would have exercised discretion to allow Patrick Street's claim to proceed on its merits and would have remitted the matter to the application judge. Côté J. dissented separately and would also have allowed the appeal and remitted Patrick Street's claim for decision on its merits. She concluded that res judicata cannot be raised for the first time on appeal if not raised at first instance, that 11368 had not pleaded or properly raised it in the 2019 application, and that 11368 was therefore estopped from arguing the issue on appeal. She held further that none of cause of action estoppel, issue estoppel, or abuse of process by relitigation applied on the facts. Even if any of these doctrines had been made out, she would have exercised discretion not to apply them, providing an extensive analysis of the lack of clarity surrounding what was actually raised and decided in the 2016 and 2019 applications, the heightened risk of injustice when res judicata is applied in the context of summary proceedings such as applications, and an apparent windfall to 11368 of $4 million if Patrick Street's claim were barred.

Costs

Before the Supreme Court, 11368 sought, for the first time in the proceedings, an order for solicitor-client costs to be paid personally by Patrick Street's counsel, relying on the 1992 Ontario decision Donmor Industries Ltd. v. Kremlin Canada Inc. (No. 2). The majority rejected both requests. Solicitor-client costs are reserved for the most exceptional circumstances involving "reprehensible, scandalous or outrageous conduct," and Patrick Street's relitigation of its claim did not meet that threshold. Personal costs against counsel require a finding of bad faith, which had not been made by the trial judge and was not supported on the record. The Court noted that 11368 had been content in the courts below to receive costs on a party-and-party basis.

Disposition and outcome

The Supreme Court of Canada dismissed the appeal, with Karakatsanis, Côté and Martin JJ. dissenting. The successful party was the Respondent, 11368 NL Inc., with the majority ordering costs payable by Patrick Street to 11368 on a party-and-party basis. The specific dollar amount of the costs award cannot be determined from the decision, as the Court did not fix a quantum and ordered party-and-party costs without specifying an amount; the underlying substantive dispute concerned the $4 million collateral mortgage and the residue of the sale proceeds from Kenmount Terrace, the precise residue figure not being stated in the decision.