When You Know, You Know: The Supreme Court of Canada Clarifies the Degree of Knowledge Required for Discoverability

In Grant Thornton LLP v. New Brunswick,[1] the Supreme Court of Canada considered the standard for determining whether a plaintiff has the requisite degree of knowledge to discover a claim under section 5 of New Brunswick’s Limitation of Actions Act (“LAA”),[2] which is similar to other provincial limitation statutes in establishing a two year limitation period.[3]

The Supreme Court held that a claim is discovered when a plaintiff has actual or constructive knowledge “of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn.” A plaintiff does not need to have knowledge of all of the constituent elements of the claim to discover it.

Background

In the fall of 2008, a New Brunswick-based company sought loans from the Bank of Nova Scotia (the “Loans”). To obtain the Loans, the company needed loan guarantees from the Province of New Brunswick. The province agreed to $50 million in loan guarantees conditional upon the company undergoing an external review of its assets by an auditing firm (Grant Thornton, the “Auditor”).

The Auditor delivered an opinion letter and a report on the company’s consolidated financial statements, opining that they presented fairly, in all material respects, the company’s financial position. On June 30, 2009, the province executed the loan guarantees and the company then received the Loans. The company ran out of working capital four months after receiving the loan guarantees and ultimately went into receivership. The province paid out the $50 million in guarantees on March 18, 2010.

In June 2010, the province retained a separate accounting and auditing firm to review the company’s financial position. That firm’s draft report was issued in February 4, 2011 (the “Richter Report”). The Richter Report found that the company’s financial statements had not been prepared in conformity with Generally Accepted Accounting Principles, there were material errors in the financial statements, and the company’s assets and net earnings had been overstated by a material amount. The Auditor had not identified these issues.

On June 23, 2014, the province issued a Statement of Claim against the Auditor alleging negligence. The Auditor denied the allegations and brought a summary judgment motion seeking to have the province’s claim dismissed as being statute-barred under the LAA because it was commenced two years after it was discoverable.

Motions Judge’s Decision[4]

The main issue before the motions judge was when the province discovered its claim against the Auditor under section 5 of the LAA. The motions judge interpreted the test to be whether 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 Auditor.

The motions judge held that the province had the requisite knowledge by March 18, 2010, at which time it had suffered the loss of $50 million and could reasonably have inferred that the Auditor caused or contributed to the act or omission that gave rise to the loss. In the alternative, he found that the province had the requisite knowledge after it received the draft Richter Report on February 4, 2011. Under either scenario, the province had the requisite knowledge more than two years before it commenced its claim. The motions judge found that the claim was therefore statute-barred and granted judgment in favour of the Auditor.[5]

Court of Appeal for New Brunswick Decision[6]

The Court of Appeal allowed the province’s appeal, finding that the motions judge applied an incorrect test. The Court of Appeal rejected the “prima facie grounds” standard, finding that it was not stringent enough. It held that the correct test was whether the plaintiff “knows or ought reasonably to have known facts that confer a legally enforceable right to a remedy,” which can only exist if the plaintiff has knowledge of each constituent element of the claim. Applying that test, the Court of Appeal found that the province had still not discovered its claim and could only do so when the Auditor produced its files for the province’s inspection. Without that evidence, the province could only “suspect and allege”, but could not know whether the Auditor was negligent.[7] As a result, the Court of Appeal found that the claim had been brought in time.

Supreme Court Decision

The Supreme Court allowed the Auditor’s appeal, finding that the province had discovered its claim by February 4, 2011, the day it received the draft Richter Report.[8] By this time, the province knew or ought to have known that a loss occurred and that it was caused in whole or in part by conduct which the Auditor had been retained to detect, giving rise to the plausible inference of negligence.[9] The province did not bring its claim until more than two years later, so the claim was statute-barred.

Two separate inquiries are required to decide which standard to apply when determining whether a plaintiff has the requisite degree of knowledge to discover a claim. The first inquiry asks whether, in determining if a statutory limitation period has been triggered, the plaintiff’s state of knowledge is to be assessed in the same manner as the common law rule of discoverability. Under that 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 through the exercise of reasonable diligence. The common law rule does not apply to every statutory limitation period and can be ousted by clear legislative language. Assessing whether a legislature has codified, limited or ousted the common law rule is a matter of statutory interpretation. The wording of section 5 of the LAA codified the common law discoverability rule.[10]

The second inquiry is focused on the particular degree of knowledge required to discover a claim. The Supreme Court held that a claim is discovered when a plaintiff has actual or constructive knowledge “of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn.”[11] The material facts required are those listed in s. 5(2) of the LAA:

5(2) A claim is discovered on the day on which the claimant first knew or ought reasonably to have known

(a) that the injury, loss or damage had occurred,

(b) that the injury, loss or damage was caused by or contributed to by an act or omission, and

(c) that the act or omission was that of the defendant.

This list is cumulative, so all three facts are required to trigger the limitation period.

Both direct and circumstantial evidence can be used when assessing the plaintiff’s state of knowledge.[12]

Mere suspicion or speculation is not enough. But the Court of Appeal established too high a standard because perfect knowledge or certainty of liability is not required.[13] A plaintiff does not require knowledge of all of the constituent elements of a claim to discover it. The Court referenced the well-established principle that a plaintiff does not need to possess knowledge of the exact extent or type of harm suffered or the precise cause of injury for a limitation period to run.   

A plaintiff will have constructive knowledge when the evidence shows that the plaintiff ought to have discovered the material facts by exercising reasonable diligence.[14] Suspicion may “trigger” that exercise.

In a negligence claim, the plaintiff does not need knowledge that the defendant owed it a duty of care or that the defendant’s act or omission breached the applicable standard of care. Knowledge that a defendant breached the standard of care is often only obtained through the discovery process or by exchanging expert reports, which typically occurs after a claim has already been commenced.[15] This standard adopted by the Court of Appeal is too exacting. What is required is actual or constructive knowledge of the material facts upon which a plausible inference can be made that the defendant acted negligently.[16] The plausible inference of liability standard strikes the right balance of interests which the common law rule of discoverability tries to achieve.

Case Information

Grant Thornton LLP v. New Brunswick, 2021 SCC 31

Docket: 39182

Date of Decision: July 29, 2021

___________________________________________

[1] 2021 SCC 31 [Grant Thornton].

[2] SNB 2009, c L-8.5.

[3] The New Brunswick legislature modeled s. 5 of the LAA on similar limitation provisions found in Ontario, Saskatchewan, and Alberta.

[4] 2019 NBQB 36 (Grant J.)

[5] Grant Thornton, at paras 18-21.

[6] 2020 NBCA 18, 54 C.P.C. (8th) 271 (Drapaeu, Quigg and Green JJ.A.)

[7] Grant Thornton, at paras 22-25.

[8] Seven judges presided over the appeal. The Honourable Justice Moldaver wrote the decision on behalf of the Court, with the other six judges concurring.

[9] Grant Thornton, at para 62.

[10] Grant Thornton, at para 40.

[11] Grant Thornton, at para 42.

[12] Grant Thornton, at para 44.

[13] Grant Thornton, at para 47.

[14] Grant Thornton, at para 44.

[15] Grant Thornton, at para 48.

[16] Grant Thornton, at para 48.

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