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The Limitation Clock: Supreme Court of Canada Refines Discoverability Rule

Published:

August 3, 2021

Author(s):

• Tony Richardson

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On July 29, 2021, the Supreme Court of Canada refined the test for determining when a plaintiff has discovered a claim for the purpose of a general limitation period. In Grant Thornton LLP v. New Brunswick, Canada’s highest court confirmed that a plaintiff “discovers” its claim when it has actual or constructive knowledge of the material facts, as set out in the limitation statute, upon which a plausible inference of liability can be drawn. The decision is significant because it replaces the patchwork of approaches to “discoverability” that have developed since the Court rendered its seminal decision of Central Trust Co v. Rafuse more than three decades ago, refining the rule and giving all litigants a greater degree of certainty around when a limitation period starts to run. While the decision is based on the New Brunswick limitation of actions legislation, each Canadian province and territory has a limitation of actions law, and most include a similar “discoverability” standard, making the decision relevant to litigants across Canada.

Here’s a look at the factual background, the Court’s decision, and how the Court refined the discoverability rule. McInnes Cooper Litigation Lawyer Tony Richardson represented the successful party.

The Background. In June 2009, the Province of New Brunswick provided $50M in loan guarantees to Atcon Holdings Inc., a New Brunswick-based construction company. The government of the day guaranteed the loans despite the repeated recommendations of its bureaucrats against providing additional taxpayer dollars to Atcon. Prior to the issuance of the loan guarantees, Atcon provided the Province with its audited F2009 financial statements in which Grant Thornton opined the financial statements presented fairly, in all material respects, Atcon’s financial position in accordance with generally accepted accounting principles (GAAP). Less than one year later, in March 2010, Atcon’s lender placed Atcon into insolvency proceedings and called on the loan guarantees. As a result, the Province paid $50M to the lender. In June 2010, the Province retained RSM Richter Inc. to perform what was effectively the same mandate as Grant Thornton in relation to Atcon’s F2009 financial statements. The Province prohibited Richter from communicating with Grant Thornton. As a result, Richter couldn’t comment on Grant Thornton’s auditing work. In February 2011, Richter provided an 88-page report to the Province concluding Atcon’s F2009 financial statements hadn’t been prepared in accordance with GAAP and contained material misstatements. The Province took no further steps to investigate whether it had a claim against Grant Thornton. However, in June 2014, the Province sued Grant Thornton for $50M claiming that Grant Thornton negligently audited Atcon’s F2009 financial statements. The Province’s 106-paragraph Statement of Claim mirrored the Richter Report, sometimes copying it verbatim. Grant Thornton denied liability throughout and continuously stood behind the audit work it had performed.

The Decision. Grant Thornton brought a motion for summary judgment asking the Court to dismiss the Province’s legal action on the ground it filed the action more than two years after it had discovered its claim. New Brunswick’s Limitation of Actions Act requires a plaintiff to bring its claim within two years from the day on which they discover the claim. Grant Thornton argued the Province “discovered” its claim in February 2011 when it received the Richter Report. The Province argued it had yet to “discover” its claim because it didn’t know whether Grant Thornton had breached generally accepted auditing standards in its performance of the Atcon audit. The Court decided the Province discovered its claim against Grant Thornton when it received the Richter Report in February 2011 because at that point, the Province had actual or constructive knowledge of the material facts to draw a plausible inference of liability. The Court expressly noted that this doesn’t mean Grant Thornton was negligent; this question would have been decided in a trial of the Province’s legal action if it had filed it within the limitation period. As a result, the Court dismissed the Province’s action as barred by the limitation of actions legislation.

The Discoverability Rule Refined. In its 1986 decision in Central Trust Co v. Rafuse, the Supreme Court held that for the purposes of limitation of actions legislation, a claim is discovered “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”. Since then, there has been confusion about the degree of knowledge required to “discover” a claim. The different formulations ranged along a spectrum between mere suspicion to perfect knowledge of a potential claim. In Grant Thornton LLP v New Brunswick, the Supreme Court refined the discoverability rule to address this confusion, giving all litigants the ability to determine when a limitation period starts – and when it ends – with greater certainty:

• Plausible Inference of Liability. The Court clarified that “the governing standard requires the plaintiff to be able to draw a plausible inference of liability on the part of the defendant from the material facts that are actually or constructively known.”

• The Material Facts. The Court confirmed that to discover a claim, the plaintiff must only have knowledge of the material facts set out in the limitation statute, that is, that a loss occurred that was caused by or contributed to by an act or omission of the defendant. The Court categorically rejected the Province’s submission that knowledge of the material facts necessary to satisfy each element of negligence, including breach of the standard of care, is required.

• Knowledge. The Court held that both direct and circumstantial evidence can be used to assess a plaintiff’s state of knowledge. A plaintiff will have constructive knowledge when the evidence shows the plaintiff ought to have discovered the material facts by exercising reasonable diligence. In other words, the plaintiff can’t sit idle and not investigate whether it has a claim.
  

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  Please contact your McInnes Cooper lawyer or any member of our Litigation Team @ McInnes Cooper to discuss this topic or any other legal issue.

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