Supreme Court of Canada restores dismissal of $50 million auditor’s negligence claim due to expired limitation period
July 29th, 2021
In a unanimous decision released this morning in Grant Thornton LLP v. New Brunswick, the Supreme Court of Canada restored a judgment of the New Brunswick Queen’s Bench that dismissed as statute-barred a $50 million claim brought by New Brunswick against accounting firm, Grant Thornton LLP.
The claim stemmed from a loan guarantee that was given by the Province of New Brunswick that allowed the Atcon Group of Companies (“Atcon”) — a New Brunswick-based provider of construction, energy, industrial and waste management services – to borrow $50 million from the Bank of Nova Scotia in 2009. On April 24, 2009, New Brunswick agreed to a total of $50 million in loan guarantees, conditional upon Atcon subjecting itself to an external review of its assets by an auditing firm. The Province agreed that Atcon’s auditor, Grant Thornton, could perform the external review. Grant Thornton delivered a letter to the Province detailing the work it had done in performing its audit of Atcon’s consolidated financial statements for the fiscal year ending January 31, 2009 a month later. On June 18, 2009, Grant Thornton delivered an Unqualified Auditor’s Report to the Province that opined that Atcon’s financial statements presented “fairly, in all material respects, the financial position of [Atcon] as at January 31, 2009 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.”
Atcon experienced ongoing financial difficulties and, four months later, it had run out of working capital and was put into receivership by the bank. New Brunswick was called upon to honour its loan guarantee and it paid out all $50 million of the loan money on March 10, 2010. Concerned about the bank’s call on the loan guarantees, the Province retained accounting firm RSM Richter Inc. in June 2010 to review Atcon’s financial position for F2009 and Richter issued a report in draft on February 4, 2011, and finalized it on November 30, 2012. Save for some grammatical corrections, the final report was identical to the draft report. The Province made a formal complaint about Grant Thornton’s audit to the New Brunswick Institute of Chartered Accountants on December 12, 2012 but did not commence its negligence claim against Grant Thornton until a year and a half later – on June 23, 2014.
The New Brunswick Court of Queen’s Bench dismissed the action as statute-barred under the N.B. Limitation of Actions Act, as the Province ought to have known it had a claim against Grant Thornton more than two years before it was commenced. The dismissal was overturned by the N.B. Court of Appeal, which found that, under s.5(1)(a) of the Limitation of Actions Act, a plaintiff cannot know or ought reasonably to have known facts that confer a legally enforceable right to a remedy until the plaintiff has knowledge of each constituent element of the claim.
The Supreme Court of Canada disagreed and restored the lower court’s judgment. In writing for the unanimous court, Mr. Justice Moldaver stated, “Respectfully, the Court of Appeal adopted too high a standard. In my view, a claim is discovered when the 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. It follows from this standard that a plaintiff does not need knowledge of all the constituent elements of a claim to discover that claim.” [Emphasis added]
In restoring the dismissal, Justice Moldaver, found that the s.5 of the Limitation of Actions Act (which is substantially the same as the discoverability provisions of limitations acts across Canada, including in Ontario) merely codifies the longstanding common law rule of discoverability, which dictates that “the limitation period is triggered when the plaintiff discovers or ought to have discovered through the exercise of reasonable diligence the material facts on which the claim is based.” Justice Moldaver went on to elaborate that “[t]he plausible inference of liability requirement ensures that the degree of knowledge needed to discover a claim is more than mere suspicion or speculation,” however, the standard “does not rise so high as to require certainty of liability.” It is also significant that “a plaintiff does not need to know the exact extent or type of harm it has suffered, or the precise cause of its injury, in order for a limitation period to run.”
It is significant that the Supreme Court of Canada found that in a negligence claim a plaintiff does not need actual knowledge that the defendant owed it a duty of care or that the defendant’s act or omission breached the standard of care in order for the limitation period to begin – as that often does not occur until the discovery process and the the exchange of expert reports.
In the case at bar, it was found that the Province discovered its claim on on February 4, 2011, when it received the draft Richter Report. At that point, “the Province had actual or constructive knowledge of the material facts — namely, that a loss occurred and that the loss was caused or contributed to by an act or omission of Grant Thornton. Nothing more was needed to draw a plausible inference of negligence.”
This case should be of interest, not just to auditors, but also to other professionals and service providers. Canadian Courts of Appeal and lower courts have in recent years been increasingly reluctant to dismiss negligence claims as statute-barred – to the point where something very close to certainty seems to be necessary before a finding will be made that a plaintiff knew or should have known of his/her claim. In professional negligence claims there is almost always a “grey area” on whether an applicable standard was breached. Requiring a level of knowledge so close to certainty can render limitation periods almost meaningless in such cases. It would appear that this decision of the Supreme Court of Canada has countered that trend and moved the needle in favour of increased enforcement of limitation periods in such cases.