The More You Know: Supreme Court of Canada clarifies common law discoverability principle

Limitations statutes are among the most important rules for litigators and litigants alike—take too long to bring your claim, and you may be barred from seeking relief. Thankfully, the discoverability principle generally precludes the limitation period running before the plaintiff knows they have a claim. But determining when a plaintiff has or ought to have discovered a claim is a contextual question based on the plaintiff’s knowledge of the material facts. In Grant Thornton LLP v. New Brunswick, 2021 SCC 31, the Supreme Court of Canada clarified the role that the common law rule of discoverability plays in applying provincial limitations statutes, and the requisite standard of knowledge required to “discover” a claim under the common law standard.

What you need to know

  • Limitations statutes may codify, limit or oust the common law rule of discoverability.
    • Determining whether a limitations statute has modified or ousted the common law rule is a matter of statutory interpretation. Clear statutory language is required to oust the common law rule.
  • The degree of knowledge required to discover a claim is “a plausible inference of liability”—more than mere suspicion or speculation, but less than a certainty.

Background

In 2008, Atcon Group of Companies requested that the Province of New Brunswick guarantee certain loans that it needed to meet its financial obligations. The Province agreed to provide the guarantees, conditional upon Atcon receiving an external review of its assets by an auditing firm. The Province agreed that Atcon’s auditor, Grant Thornton, could perform the external review.

In its audit report, Grant Thornton opined that Atcon’s statements were a fair representation, in all material respects, of Atcon’s financial position. Relying on Grant Thornton’s audit, the Province delivered the loan guarantees to Acton.

Shortly thereafter, Atcon’s financial circumstances deteriorated and the lender called on the Province to pay out the loan guarantees. The Province paid the guarantees and simultaneously retained an auditing firm to conduct a review of the same financial statements reviewed by Grant Thornton. The Province’s auditing firm provided a different report from Grant Thornton: Acton’s financial statements were not performed in accordance with GAAP and contained various material errors, including overstating its assets and net earnings. This report was provided to the Province in draft on February 4, 2011. The report was finalized on November 30, 2012, with only minor grammatical changes.

On December 12, 2012, the Deputy Minister of Economic Development made a formal complaint against Grant Thornton, attaching the Province’s audit report. A year and a half later, on June 23, 2014, the Province commenced a claim against Grant Thornton in negligence. Grant Thornton sought to summarily dismiss the Province’s claim on the basis that it was barred by the two-year limitation period.

Two approaches to discoverability

Grant Thornton’s motion turned on the standard to be applied in determining whether a plaintiff has the requisite degree of knowledge to have “discovered” a claim, which triggers the two-year limitation period. Like most provinces, New Brunswick’s limitation statute provides that a claim is discovered when a claimant “knew or ought reasonably to have known” certain material elements of the claim.

The motions judge granted summary judgment, finding that the Province “knew or ought to have known” that it had prima facie grounds to infer that it had a potential cause of action against the defendants by the date it had paid $50 million to pay out Atcon’s loan. In the alternative, he found that the Province had the requisite knowledge when it received the draft report from its auditing firm in February 2011.

The Court of Appeal overturned the decision, finding the motions judge had applied the wrong test by considering “prima facie grounds to infer…a potential cause of action”. Instead, the Court of Appeal determined that, until Grant Thornton produced its audit-related files for the Province’s inspection (which it refused to do), the Province could not know that the audit was non-compliant.

The Supreme Court’s decision

The Supreme Court unanimously overturned the Court of Appeal’s decision and restored the motions judge’s decision that the Province’s claim was time-barred. However, it rejected the approaches to discoverability applied by both lower courts. The Court (1) opined on the role of the common law discoverability rule in applying statutory limitation period, and (2) affirmed that a claim is discovered when a plaintiff has knowledge, actual or constructive, of the material facts upon which a “plausible inference” of liability on the defendant’s part can be drawn.

Common law discoverability

The Supreme Court began its analysis with a review of the common law discoverability rule: “a cause of action arises for purposes of a limitation period when the material facts on which it is based have been discovered or ought to have been discovered by the plaintiff by the exercise of reasonable diligence.”1 The rule seeks to both avoid the injustice of a precluding a claim before the plaintiff can be aware of it and achieve the underlying rationale for limitation periods (the guarantee of repose, the risk of stale evidence, and the expectation that claims will be prosecuted promptly).

The Court explained that the common law rule assists as an interpretive tool for construing limitations statutes. However, provincial limitations statutes may codify, limit or oust the common law rule. While the Court noted that the extent to which the common rule applies is a matter of statutory interpretation, “clear legislative language” is required to oust the common law rule.

After reviewing the New Brunswick discoverability provision, the Court held that it codified the common law discoverability rule.

The requisite degree of knowledge

The Court did not agree with either of the lower courts on the degree of knowledge required to discover a claim and trigger the limitation period. Instead, it held “a claim is discovered when a plaintiff has knowledge, actual or constructive, of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn.” Where the provision sets out the material facts of which the plaintiff must have actual or constructive knowledge, the terms of that provision govern.

What is a “plausible inference” of liability? The Court held that it is one that gives rise to a “permissible fact inference.” The standard requires more than mere suspicion or speculation, but does not rise to the point of requiring certainty of liability. A plaintiff need not know the exact type of harm it has suffered or the extent or cause of the injury for the limitation period to begin.

The Court held that it is permissible to assess both direct and circumstantial evidence in determining a plaintiff’s state of knowledge. If the evidence shows that the plaintiff ought to have discovered the materials facts by exercising reasonable diligence, constructive knowledge will be made out.

In this case, the Court found the Province had actual or constructive knowledge of its claim against Grant Thornton on the date it received the draft report from its auditor indicating that Atcon had made various material errors in its financial statements. The Court of Appeal had imposed too high a standard by requiring that the Province be aware of the constituent elements of negligence, as this could require a plaintiff to be aware of facts—such as whether a standard of care had been breached—that could only be known through the discovery process. The Province did not need access to Grant Thornton’s audit-related files to infer that there had been a breach of the standard of care.

The unanswered question

While the Supreme Court affirmed that a limitation period will start to run when the plaintiff ought to have discovered the material facts by exercising “reasonable diligence”, Grant Thornton did not provide the Court with an opportunity to opine on what amounts to reasonable diligence. That question is an oft-litigated and fact-specific issue that will likely remain a significant feature of limitation-related disputes.

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1 Central Trust Co. v Rafuse, [1986] 2 SCR 147, at p 224, citing Kamloops (City of) v Nielsen, [1984] 2 SCR 2; see also Ryan v Moore, 2005 SCC 38, [2005] 2 SCR 53, at paras 2 and 22

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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